So far in his presidency, Joe Biden has struggled to fill several leadership positions at the major banking authorities. The two most high-profile examples of this are the withdrawn nominations of Cornell law professor Saule Omarova for comptroller of the currency and attorney Sarah Bloom Raskin for vice chair for supervision on the Federal Reserve’s Board of Governors. With a few glaring exceptions, these nomination battles were fought over the direction of banking policy that the two legal scholars would have pursued and what role the government should play on a host of emerging topics.

In Driverless Finance, American University law professor Hilary Allen weighs in regarding one of the major issues of disagreement: the use of technology to augment or replace traditional financial services. Allen has worked for several prominent law firms and also spent time on the staff of the Financial Crisis Inquiry Commission (FCIC), a body responsible for investigating the causes of the 2007–2009 financial crisis. This is her first book, and in it she tells the brief history of the rapid expansion of fintech and conveys her concerns about where its uncontrolled growth might lead.

The book’s title gives readers the vision of fintech as a driverless car careening down the road, wiping out innocent financial bystanders who happen to cross its path. Although the fintech world is mostly focused on the micro level and financial innovation for individual consumers, Allen’s argument is that we must be wary of fintech from a broader financial stability vantage point.

An ugly future? / Driverless Finance starts with a segment lifted from an imagined FCIC-style report produced in the year 2031. Allen imagines a financial crisis sparked by the fictional HAL Bank, a name inspired by the scary algorithmic-driven computer in 2001: A Space Odyssey. In Allen’s version, HAL is a too-big-to-fail bank that owns a subsidiary, BotWay, that develops an algorithm that assimilates data from the cryptoasset markets into a trading program. The scheme goes awry, leading to instability and a bailout for HAL Bank. The cause of the crisis according to Allen’s imagined report:

We conclude that the growth of the cryptoasset market was a key cause of the crisis…. We conclude that the government and the Federal Reserve were ill-prepared for the crisis and therefore struggled to contain the fallout.

An introductory background chapter provides Allen’s preventative for such crises: financial stability regulation — a system of so-called “precautionary regulation” “ensuring that the institutions and markets that make up the financial system are robust enough that they will continue to be able to help people manage risks, invest, borrow, and make payments even if some kind of unexpected shock occurs.” She laments the view of those who “see crises as organic parts of the business cycle that cannot be avoided and therefore must simply be endured.” Her idea is to intervene before a crisis has a chance to unfold to “make financial crises less likely and less severe.” Of course, efforts to achieve this have a long history, dating back at least as far as the Panic of 1907 and the 1913 Federal Reserve Act approved in its aftermath.

The 2000s crisis / Allen gives readers a better sense of her approach by presenting her narrative of the 2007–2009 financial crisis. Her description faults “mortgage lenders” and “mortgage-backed securities” for causing the crisis, with nary a mention of the role that government-sponsored systemic giants like Fannie Mae and Freddie Mac played in driving the growth of mortgage products. For the financial authorities and policymakers who contributed to this risk-laden environment, botched the supervision of the largest banks and financial companies, and were blindsided by the magnitude of the crisis, she gives praise, referring to the “Herculean and imaginative crisis response efforts from the Federal Reserve and other government bodies.”

Allen further displays her preference for government-driven solutions to financial instability during a later discussion of banks and bank runs. She claims that bank runs and panics “were largely eliminated by the introduction of government-backed deposit insurance in 1933.” “Largely” does a lot of work here, given the final report of the FCIC, the committee she worked for, which detailed runs in 2007–2008 at five large institutions covered by the Federal Deposit Insurance Corporation: Countrywide, IndyMac, Washington Mutual, Wachovia, and Citibank. (See “Run, Run, Run,” Cato Policy Analysis no. 747, April 2014.)

Lurking financial stability dangers / In contrast to her comfort with the solutions provided by historical government interventions, Allen has a great deal of discomfort with the “potential for fintech innovation to undermine financial stability.” She provides a case study of mobile payments service Venmo and its digital wallet feature. She notes that Venmo balances are not protected by the FDIC or its resolution procedures. Her conclusion: the company could be vulnerable to a run triggered by negative press. She worries that even though Venmo is microscopic compared to today’s too-big-to-fail institutions, “as mobile payments services become more popular” and its customers get “more comfortable storing large amounts of money in their digital wallets,” company instability could be transformed into systemic instability.

How would precautionary regulation of fintech unfold? The process would involve an initial licensing review process for fintech innovation. On this, Allen follows Omarova (whom Allen cites throughout the book), who proposes that innovations should go through a three-pronged licensing approval process: an economic purpose test, an institutional capacity test, and a systemic effects test. Omarova’s approach would have regulators vet new fintech products before they can enter the market, rather than leave them to the market alone. All of this would be imposed even though fintechs in most cases are not part of the government financial safety net.

A second aspect of Allen’s precautionary regulation would be policymakers determining when and how to intervene in financial markets before a crisis has a chance to unfold. She would place a lot of responsibility on the existing Office of Financial Research (OFR), a sleepy and little-known agency currently housed in the Treasury Department. The OFR would take on an expanded role as “a scientific and technological expertise hub.” What she does not mention is that the OFR has accomplished little in its 10-year history, notwithstanding an annual funding level of $75 million. One accomplishment she does mention is its maintaining a Financial Stress Index, but that is not very different from an index maintained by the Federal Reserve Bank of St. Louis.

Allen’s idea is to build a “deep bench” of expertise at the OFR — presumably by hiring several academics or practitioners in fintech — as a prelude to market interventions to avoid a future crisis. But we’ve been following that strategy for over a century. Her proposal is a plan for throwing more good money after bad.

Her argument for intervention is based on the potential systemic risk that fintech products present. The analogy to a driverless car and the discussion of the potential for damaging bank runs is meant to scare policymakers into action. This is reminiscent of the “Chicken Little” arguments supporting the financial authorities’ bailout mentality in 2008.

Concerning Allen’s example of Venmo, I believe the company itself and the FDIC should make clear that its accounts are not federally insured. Then, if its customers still put their money at risk and lose, that risk-taking is their choice. The same applies to “stablecoin,” cryptocurrency financial products that are often asset-backed.

Allen cites examples like Venmo and others as a rationalization for precautionary regulation. She questions the need for even considering the low likelihood and speculative nature of such scenarios, lamenting that it is “very difficult to quantify the benefits of financial stability regulation,” and claiming that “we can’t assign a value to avoiding that future crisis,” and “if regulation can be even partially successful in preventing or mitigating them, then it is worth pursuing.” As a result, her case studies are wildly speculative about what might happen without making any estimate of the probability that Venmo or a similar mobile payments service will cause a systemic disruption. The studies also do not cite any critical function they provide that would cause them to require a systemic designation. Countless times throughout the book, she relies on descriptions of what “can,” “might,” “could,” or “has the potential” to happen.

Ultimately, the question is whether fintech’s development should be driven by markets or regulatory authorities. Thus far, fintech has been a phenomenon of a decentralized marketplace. If readers think the market is better at sorting out these issues, they will have sharp differences with Allen’s policy arguments because she wants to rein in fintech and thus change its nature.