Fractionalizing Investment Securities: Using FinTech to Expand Financial Inclusion

78 Pages Posted: 23 Mar 2023 Last revised: 21 Feb 2024

See all articles by Steven L. Schwarcz

Steven L. Schwarcz

Duke University School of Law

Robert Bourret

Duke University School of Law

Date Written: March 16, 2023

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

Suggested Citation

Schwarcz, Steven L. and Bourret, Robert, Fractionalizing Investment Securities: Using FinTech to Expand Financial Inclusion (March 16, 2023). Ohio State Law Journal, Vol. 84, 2023, Duke Law School Public Law & Legal Theory Series No. 2023-23, Available at SSRN: https://ssrn.com/abstract=4391083 or http://dx.doi.org/10.2139/ssrn.4391083

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
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919-613-7231 (Fax)

Robert Bourret

Duke University School of Law ( email )

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