Author and professor of law, Hilary J Allen, has written a book, Driverless Finance: Fintech’s Impact on Financial Stability, to add to the ceaseless conversation on financial technology (fintech) innovation and the incredible growth of fintech as a business model.

Allen explores the threats that different fintech innovations pose for our financial system. Beyond just providing helpful descriptions of new financial technologies and business models – such as distributed ledgers, machine learning, cryptocurrency and robo-investing – the book helps readers think about how laws, plus legal and compliance professionals, should respond to it.

She applauds the innovation while beseeching all stakeholders to recognize the guardrails needed and the telltale signs of when control procedures must be activated to save our financial infrastructure from possible calamity.

How does she do this? Well, without mincing words or adding decorative trimming to what she sees as viable threats. She starts with a fictional and futuristic final report that looks into the causes of a 2030 financial and economic crisis, drawing a line from how crypto assets linked with artificial intelligence (AI) agents could serve as the sparks that light it, with such factors as robo-investing exacerbating it.

You have to read it to appreciate how palpable and possible it all feels.

Worst-case scenario

I asked Professor Allen a few questions about her references to hypothetical situations and discussions about risk involving cryptocurrency and AI. I wanted to find out more about the possible amplification of those risks by virtue of the technology that digital assets use (like blockchain ledger technology and smart contracts).

How was she hoping those references would illustrate her concerns about the latest and hottest technology tools?

“I wanted to highlight the worst-case scenario flowing from all of the hottest new technologies being given free rein in the marketplace,” Allen said. “Obviously both crypto and AI can cause risks to financial stability independently. But something that is common to both of them (smart contracts on a blockchain and AI) is the fragility that comes from too much automation in service of efficiency,” she added.

“The reality is, though, that making new laws for new technology is a highly political act that is often co-opted by industry for their own benefit and at the expense of the public.”

Hilary J Allen, Professor, American University Law School

“I’m more and more convinced of the need for pauses, discretion, and flexibility to keep our financial system safe from the worst implosions, but automation can make pauses, discretion, and flexibility harder to exercise. Underneath that automation, the risks are what they always were, particularly herd behavior and complexity-induced opacity.

I recalled her telling me and everyone else in the audience for the SEC’s roundtable on AI earlier this year that regulatory frameworks and rules are likely sufficient to meet the risk challenges posed by AI. But I challenged her on this, saying she sounds more pessimistic in her book, or at least more measured about whether they are currently sufficient.

“My thinking on this issue has evolved a bit since I wrote the book,” Allen said. “This is because I have been privy to the debate about crypto regulation over the last three years and have seen the political economy of it firsthand. I think that if everyone was working in good faith to get the best possible outcome for the public, then the position in the book could be: Take a measured approach to which laws are working, which ones are not, and make changes accordingly.”

“The reality is, though, that making new laws for new technology is a highly political act that is often co-opted by industry for their own benefit and at the expense of the public. In these circumstances, new laws are often inferior to the status quo. The good news is that financial regulation is often comprehensive and flexible enough to deal with technological change without requiring significant edits to the laws on the books,” she added.

SEC crypto roundtables

I asked Professor Allen about the SEC’s recent array of crypto roundtable events featuring the thoughts and suggestions of industry participants, regulators, trade association representatives and consultants and mentioned to her that the participants were not coming to any true consensus on regulatory approaches. I asked her for her impressions, given that she had been at the first one of the series on tokenization.

“The roundtable mainly featured industry perspectives, but I was there with one other colleague speaking on behalf of the public interest. I too am curious about how the commission will balance the different perspectives. I do hope the predominance of industry participants at these events won’t lead to rulemakings that are tilted in favor of industry interests and away from investor protection and maintaining the stability of the securities markets,” Allen added.

Hilary J. Allen is a professor of law at American University’s Washington College of Law in Washington, DC. She specializes in the areas of banking law, securities regulation, technology law and business associations.

Her book, Driverless Finance: Fintech’s Impact on Financial Stability, is available from Oxford University Press (2022).