Vanderbilt Law Review

First Page



The global financial crisis of 2008 ushered in the most sweeping reform of financial regulation in the United States since the New Deal. Alarmed by the systemic risk that financial institutions posed to the broader economy, as well as perceived abuses engendered by the "too big to fail" mindset among banking executives, legislators moved quickly to impose a slew of new requirements on the financial sector. These reforms, passed under the umbrella of the Dodd-Frank Act, drastically altered the regulatory landscape for financial institutions.' Wall Street firms found themselves subject to a bewildering array of new regulatory requirements, from restrictions on proprietary investing (the so-called Volcker Rule), to obligatory stress testing of banks' ability to withstand various crisis scenarios, to more stringent reporting requirements.

At the same time that Congress was focused on fixing Wall Street, dramatic changes were taking place in a less well-known and still emerging sector of the financial world: the fintech sector. This collection of start-ups and venture capital-backed companies were using developments in network technology and "big data" analysis to disrupt the way that financial services could be provided. From crowdfunding to robo-advisors to Bitcoin, financial technology firms have introduced innovations to a wide variety of areas and have allowed smaller, nimbler competitors to enter the financial marketplace. In doing so, the fintech revolution promises to produce great benefits for the wider economy, including broader access to capital, fairer lending standards, better investment advice, and more secure transactions. It is no wonder that Jamie Dimon, JPMorgan Chase's CEO, warned investors in 2015 that "Silicon Valley is coming." But the rise of fintech poses a challenge for current financial regulations. The Dodd-Frank reforms primarily aimed to prevent traditional banks from repeating the excesses of the precrisis era. They labeled certain financial institutions "systemically important" and imposed a variety of reporting and structural requirements on these actors. They created new regulators to police Wall Street and protect investors from their depredations. But they did not foresee the shift away from Wall Street that fintech firms had already started. The locus of financial services is becoming increasingly decentralized, with more and more areas of the financial sector being provided by small start-ups focused on narrow segments of the financial market. The financial reforms of the postcrisis years are ill suited to handle the challenges presented by this new model of financial institution. Perhaps just as importantly, the substance of financial regulation today may well stifle beneficial innovation in the financial sector, precisely at a time when other nations are racing to attract fintech to their jurisdictions. Because fintech is so new, and its ways of doing business so unconventional, regulators are only beginning to come to terms with its implications for financial regulation.

This Article argues that fintech poses a set of unique challenges to financial regulation, challenges that require us to question many of our fundamental understandings about the creation and propagation of systemic risk in the economy. In particular, the rise of fintech will undermine the widespread assumption that the primary source of systemic risk in the financial sector is the domination of large, "systemically important" banks and other financial institutions.