Fractionalizing Investment Securities: Using FinTech to Expand Financial Inclusion

Abstract

Recent innovations in financial technology, or “FinTech,” are enabling the fractionalization of investment securities, such as shares of stock and bonds. We explain how this fractionalization can fundamentally expand financial inclusion both for investors and for businesses, including small and medium-sized enterprises (SMEs). Using the fractionalization of investment securities as a model, we also counter the argument that FinTech-enabled transactions should not need regulation because they are governed by mathematical algorithms under so-called smart contracts. Additionally, we derive and test a regulatory framework to identify and help to mitigate the risks caused by fractionalization. In the process, we also explain and de-mystify smart contracts, decentralized finance (“DeFi”), and other fundamental, but often confusing, concepts associated with FinTech.

Keywords: FinTech, DeFi, securities, financial inclusion