The Case for Precaution

Abstract

Abstract This chapter explains why policymakers should take a precautionary approach to fintech innovations. It devotes considerable time to exploring the catastrophic consequences of the financial crisis of 2008, and the financial innovations that helped cause it. It also engages in a thought experiment, imagining how distributed ledgers and smart contracts could have made the last crisis even worse had they existed in the mid-2000s. The purpose of this historical review and thought experiment is to vividly demonstrate the potential harms associated with new financial technologies: as a society, we tend to support precautionary regulation of pharmaceuticals and self-driving cars because we recognize their potential to threaten human lives, but we’re less comfortable with precautionary regulation intended to protect our financial system. To help overcome this reluctance toward precautionary regulation of new financial technologies, this chapter demonstrates that the costs of financial crises are not just economic, but also tear at the fabric of our society.