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Smart contracts: will Fintech be the catalyst for the next global financial crisis?

Smart contracts: will Fintech be the catalyst for the next global financial crisis? PurposeThis paper aims to examine the risks associated with smart contracts, a disruptive financial technology (FinTech) innovation, and assesses how in the future they could threaten the integrity of the global financial system.Design/methodology/approachA qualitative approach is used to identify risk factors related to the use of new financial innovations, by examining how over-the-counter (OTC) derivatives contributed to the Global Financial Crisis (GFC) which occurred during 2007 and 2008. Based on this analysis, the potential for similar concerns with smart contracts are evaluated, drawing on the failure of The DAO on the Ethereum blockchain, which involved the loss of over $60m of digital currency.FindingsExtensive use of bilateral agreements, complexity and lack of standardization, lack of transparency, misuse and speed of contagion were factors that contributed to the GFC that could also become material concerns for smart contract technology as its adoption grows. These concerns, combined with other contextual factors, such as the risk of defects in smart contracts and cyberattacks, could lead to potential destabilization of the broader financial system.Practical implicationsThe paper’s findings provide insights to help make the design, management and monitoring of smart contract technology more robust. They also provide guidance for key stakeholders on proactive steps that can be taken with smart contract technology to avoid repeating the types of oversights that contributed to the GFC.Originality/valueThis paper draws attention to the risks associated with the adoption of disruptive FinTech. It also suggests steps that regulators and other key stakeholders can take to help mitigate those risks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Regulation and Compliance Emerald Publishing

Smart contracts: will Fintech be the catalyst for the next global financial crisis?

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1358-1988
DOI
10.1108/JFRC-09-2018-0122
Publisher site
See Article on Publisher Site

Abstract

PurposeThis paper aims to examine the risks associated with smart contracts, a disruptive financial technology (FinTech) innovation, and assesses how in the future they could threaten the integrity of the global financial system.Design/methodology/approachA qualitative approach is used to identify risk factors related to the use of new financial innovations, by examining how over-the-counter (OTC) derivatives contributed to the Global Financial Crisis (GFC) which occurred during 2007 and 2008. Based on this analysis, the potential for similar concerns with smart contracts are evaluated, drawing on the failure of The DAO on the Ethereum blockchain, which involved the loss of over $60m of digital currency.FindingsExtensive use of bilateral agreements, complexity and lack of standardization, lack of transparency, misuse and speed of contagion were factors that contributed to the GFC that could also become material concerns for smart contract technology as its adoption grows. These concerns, combined with other contextual factors, such as the risk of defects in smart contracts and cyberattacks, could lead to potential destabilization of the broader financial system.Practical implicationsThe paper’s findings provide insights to help make the design, management and monitoring of smart contract technology more robust. They also provide guidance for key stakeholders on proactive steps that can be taken with smart contract technology to avoid repeating the types of oversights that contributed to the GFC.Originality/valueThis paper draws attention to the risks associated with the adoption of disruptive FinTech. It also suggests steps that regulators and other key stakeholders can take to help mitigate those risks.

Journal

Journal of Financial Regulation and ComplianceEmerald Publishing

Published: Dec 9, 2019

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