Financial Regulation in the Bitcoin Era

50 Pages Posted: 26 Mar 2018 Last revised: 19 Feb 2019

Date Written: March 23, 2018

Abstract

The recent decade has witnessed an extraordinary degree of innovation in the financial sector. Developments in financial technology, computing power, and networking theory have allowed decentralized online platforms such as Bitcoin to fundamentally change the way that financial services are provided. While these innovations have been applauded by many as bringing a welcome degree of competition to a sector long dominated by powerful incumbents, they also create a set of challenges for current financial regulation. How do fiduciary standards apply to algorithms? How does online finance affect the behavior of investors? And more generally, how can regulators monitor and constrain the financial industry when it is increasingly run by autonomous, dispersed computer networks? This Article argues that current financial regulation is inadequate to address the unique problems presented by the rise of Bitcoin and other fintech industries. In particular, these innovations raise concerns about the ability of financial regulation to promote three inter-related financial goals: the efficient allocation of capital, the protection of consumers, and the prevention of systemic risk. These goals, at the core of current approaches to financial regulation, are all challenged by fintech’s defining feature: its reliance on disembodied institutions and complex algorithms for its functioning. These traits render the traditional tools used by regulators to discipline markets—substantive behavioral obligations, the threat of sanctions, and the constraining effect of reputation—largely ineffective. The Article concludes by proposing a set of principles to guide lawmakers in designing a more effective financial regulatory structure for the Bitcoin era.

Keywords: Financial Regulation; Fintech; Corporate Law; Bitcoin; Cryptocurrencies

JEL Classification: K22; K23

Suggested Citation

Magnuson, William J., Financial Regulation in the Bitcoin Era (March 23, 2018). Stanford Journal of Law, Business, and Finance, Vol. 23, No. 2, 2018; Texas A&M University School of Law Legal Studies Research Paper No. 18-21. Available at SSRN: https://ssrn.com/abstract=3148036

William J. Magnuson (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

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