Bloomberg Audio Studios, Podcasts, radio News. This is Masters in Business with Barry Ritholts on Bloomberg Radio.
I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Hillary Allen. She is a professor at the American University Washington College of Law in DC, where she specializes in financial regulation, banking law, securities regulation, and technology law. She published a book, Fintech Dystopia, a Summer Beach Read about how Silicon Valley is ruining things, covering the intersection of finance, technology, law, regulation,
and politics. It's a perfect subject for us to talk about. Hillary Allen, Welcome to Bloomberg.
Thank you so much for having me.
So fascinating conversation, fascinating topic that you write about. Before we jump into that, let's spend a few minutes going over your background. You get a bachelor's in Laws from the University of Sydney in Australia, a Master of Laws in Securities and Financial Regulation law from Georgetown here in the States, and you graduated first in your class there. What was the original career plan? Was it simply I'm going to go be a lawyer. What were you thinking.
The original career plan was I'm just going to be a lawyer. And then I loved law school and I practiced for seven years and discovered there wasn't so much law always in the practice of law, and I'm a nerd and I missed it. And so the drive was to go back to Georgetown and get my master's, do some academic writing, and then launch a career as a professor where I could.
Really sort of think slowly about the law.
And you practiced, you were in London, you were in Sydney, Shaman and Sterling here in New York. Tell us a little bit about the sort of legal work you were doing when you were practicing attorney.
So basically there's sort of two broad categories of the work I did. I did transactional work banking transactional, typically acting for banks in leverage buyouts.
But the work I.
Think I enjoyed more was the regulatory compliance advisory. So there was more law in that, especially when you had new financial laws being handed down in Australia and changes in the US with Dot Frank and sort of trying to figure out how to comply with those new rules.
So how do you go from practicing bank transactions and some regulatory law to ultimately working with the Financial Crisis in Greek Commission. Tell us a little bit about your experiences there.
So that was a serious of a series of fortunate events. While I was doing my master's at Georgetown, I had a professor who was tapped to be on the staff of the financialis Inquired Commission, and he pulled me into work with them two days a week and we were investigating the causes of the two thousand and eight financial crisis to put together the report that came out, which really was.
Sort of a nice thick book that they published.
It's a really thick book with a really thick index even, and the idea was to tell the story. And that's really sort of stuck with me throughout my career, the importance of being able to explain complex things and how they knit together to cause things.
So working with the FCIC, how did that affect how you looked at regulation in general, but more specifically the government's responds to technology, new financial products, the regulatory world in general.
So the gift that I got from working with the Financial Crisis in quir Commission is sort of understanding that there are a lot of things that come together and you need to really look very broadly to understand systemic changes.
Another gift that it gave me was I think a healthy skepticism of innovation rhetoric, right, because if you think back to two thousand and eight and what caused it, you know there were all these stories about well, these new financial products, these complex new derivatives, we don't need to regulate them, their innovation, sophisticated parties involved, We don't
want to tamp down on innovative potential. And so that that skepticism has been a helpful skill set as I've been navigating the sort of post two thousand and eight financial world where you have the innovation rhetoric from Silicon Valley infiltrating into financial services.
You raise a really interesting issue that I have to ask about. So, how much of what we see as regulation is either an adherence to an ideology that sometimes says regulation is good and our guardrails and capitalism and other ideology says regulation is expens and anti innovative and reduces job creation. It seems like, regardless of the facts on the ground, each side has their belief system. How do you contextualize that.
Well, I mean, I think I don't think there were too many people in the depths of the two thousand and eight crisis who were saying there's too much regulation. I think it's a function of where you are in
a particular time. I think people's memories fade really quickly, and as soon as regulation has solved the problems it was intended to solve, or the crisis that spurred the regulation has dissipated, people quickly forget why that regulation is there in place, and then it becomes much easier to see it as something that is just a hindrance, something that is just expensive, that doesn't have a role to play.
But I think what we're actually seeing right at this moment is the erosion of the securities laws that really have stood investors in goodstead since the nineteen thirties. Not to say they're perfect, but the general sort of investor protection regime that the Securities and Exchange Commission is always implemented has really encouraged trust in the US stock market, and it sort of made it the endvy of the world,
and people wanted to list here. That's really getting peeled back right now, and so I think, you know, it'll be.
Pretty soon a moment.
Where we realize why we had all that regulation, and we'll miss it.
So heading into the financial crisis, I recall looking at some of what I called radical deregulation prior. And this isn't by no means the sole cause of the financial crisis. Lots of factors led to this. But you had the Commodity's Futures Modernization Act, which allowed what was essentially an insurance product to be issued without any insurance reserves and a risky and then you had the repeal of glass steel that kept depository banks separate from speculative Wall Street banks.
It probably didn't cause the crisis, but certainly allowed it to get much bigger at the very least. And yet there didn't seem to be any desire after the crisis. Hey, maybe we should put these things back into place. Maybe we should repeal what was added and restore what was repealed. Nobody wanted. They want to go a totally different direction.
Well, I think again, this is a story of political economy, and there are still a lot of people who are mad at the Obama administration for prioritizing health care over financial reform. Because basically they had one shot at doing something big and if they had, and I'm not weighing in to say that this was the right or the wrong move, but if they had gone right out of the gates with financial reform, I think we would have
seen more of the bigger structural things that you're talking about. So, you know, in that immediate aftermath of the two thousand and eight crisis, you had Sandy will who had been the head of City Group and had sort of engineered the end.
Of the glass Stegel legislation.
And from this maybe apocryphal, but apparently he had a deal toy that said shatterer of glass Stegel that he kept on his desk. And again this may be apocryphal, but I heard that he basically sort of had a conversion after two thousand and eight said oh, yeah, probably shouldn't have done that.
Well, well, a lot of people did. Alan Greenspin famously said, I incorrectly assumed people's concern over their own reputation would have prevented some of the excesses we've seen. I'm paraphrasing, but that was pretty close to what he said.
Yeah, he said, the world sort of didn't work the way I thought it did, and I think, you know, had they gone straight out of the gates with financial reform, you might have seen some of that structural reform. But by the time they got around to it, you know, DoD Frank wesn't passed two twenty ten. You know, then the political economy calculus had shifted. The industry was in more of a position to sort of argue for weaker rules and fewer structural changes.
It's amazing how rapidly memories fade and people just quickly, Oh, no, that was then, Now it's new. You've worked inside the global financial system as well as studying it from the outside. How did being part of the FCICE affect how you perceive technology, new financial products, regulation, and deregulation. How did that affect your perspective?
You know, I didn't think a ton about technology at that time. That's sort of been a later addition to the work that I do. But the broader themes of financial innovation, regulation, deregulation, you know, I see the value in financial stability regulation in particular. So financial stability regulation are the rules that are supposed to prevent financial crises, and they work often sort of hand in hand with investor protection regulations, but they also aim to do something differently.
And part of the challenge when you're trying to prevent a financial crisis is this silo mentality where people just think about their own little piece of the world, and Okay, we can deregulate our little piece and we don't won't think about the flow on consequences and what incentives it'll create,
et cetera. And so you know, my real takeaway was always to have the most holistic perspective possible to break down that silo mentality, and later in my career that meant learning about the new technologies that are sort of infiltrating the financial system.
So I want to talk about technology and I want to talk about fintech dystopia. But there is a quote from within that that applies directly to what you're describing with stability, which was, it's the economic precarity. Stupid paraphrasing James Carville'll tell us a little bit about the economic precarity.
Yeah, So, I think a mistake that we have made collectively in recent years is to say, well, look, the economy's doing well, everything's fine, and that really doesn't mesh with many people's experience of the economy. So it used to be, well, probably not always the case, but closer to the case in the Clinton years, where there was less economic inequality than there is now, that you could
sort of say, a rising tide lifts ale boats. But now what we're seeing is over half of Americans live from paycheck to paycheck, even in a good economy, right, And so in that kind of circumstance, the financial systems, not the economy, aren't working for everybody. And so I think when we think about what we're trying to achieve with our financial system, it should be that we are
trying to find a solution to this economic precarity. And also that begs the question of whether the financial system and investing is in actually the way to get there. And maybe we need broader public policies to address that economic precarity so that no one or at least not half of the population are just scraping by.
So we just passed a new set of laws that include thousand dollars accounts for newborns is not going to solve financial inequality, or these kids, by the time they're thirty, they'll be worth millions.
I think you might need to offset against the people losing their health insurance subsidies. I don't think that one thousand dollars is going to go very far right.
And what's fascinating is watching just a parade of billionaires come out and no, no, we need to supplement that thousand dollars. So first it was Michael Dell, and then it was Ray Dalio. I don't know who else is going to step forward, but it appears, hey, we're not really paying a whole lot in axes, we might as well throw some money at some babies. That seems to be the philosophy.
Yeah, I mean, I don't love philanthropy in that sense. Supplementing democratically sort of elected policies. You know, it gives a lot of sort of discretion and power to people as to how they want to distribute their large ss.
And to some degree that's fine.
But again, when we have a society where half of the population is barely scraping by, I don't think their liveability should be predicated on the whims of billionaire large s.
Fair enough, You talked about technological innovation in your book. You argue that that is financial technology innovation is driven largely by legal design rather than technical brilliance. Explain that a little bit. What is it about fintech that seems to be working the perspective from an attorney rather than an engineer.
Yeah, so this was something that, as I said, I came to a little later in my career. I think earlier in my career when I first started looking at fintech, I generally accepted the party line, this technology is revolutionary, this technology is making things more efficient, this technology is
fixing things. And then I realized that the people who were saying that had something to sell, and I probably should learn a little more about the technology, because if you want to work on financial regulatory policy now, you need to understand the extent to which the technology actually lives up to what it's claimed it can do.
And so sort of my first sort of.
Foray into this was I've looked really in detail at blockchain, which is truly, frankly a terrible technology. It's a clunky database and it's not something you would ever choose for any kind of financial market infrastructure, but for the fact that it's been very easy to convince regulators not to regulate it, and so the value add comes from crypto has never been blockchain technology as a technology. It's been whipping up stories about that technology that have justified avoiding regulation.
And we see it in other instances as well.
You know, there are fintech lending that is replicating some of the predatory payday lending that we've seen before.
So buy now, pay later sort of financing or.
Well, payday loans have been around a lot longer than that. This is sort of a sort of it's like a four hundred dollar loan that you get to bridge you over till your next payday. And you know, there's been a lot of predation in that market in some states had banned those products essentially.
Do you think twenty nine percent interest is not fair? You have a problem with that. We're just trying to make a profit here.
Some of these interest rates are three hundred percent?
Get out. Yeah, that's insane. And what is New York turned out? It like nineteen something.
I don't know about New York. Yeah, but but.
But normally, anything you know, mid double digits is thought of as usurious. Three hundred percent is just next level.
Yeah, I mean it's not set as an interest rate per se their fees, but once you actually convert that into a paranum that can be in the hundreds of percentages. And so that has always been a problem, and we've had states act and then we've had new fintech lenders saying, well, actually, we're different from payday lenders because we use AI to screen our borrowers and.
So you should treat us differently.
And yet they're charging interest rates that are equivalent to what payday lenders do. And then you mentioned by now pay later. Again they say, well, we're not even extending loans. This isn't a loan at all, so we shouldn't have to comply with the laws around lending, around disclosure, around that kind of thing.
How is that not alone? You're buying a product that you don't have money for someone is paying for that. Isn't that alone?
I would say?
So okay, but but what what's the counter to This isn't a loan, This is a free layaway essentially?
Yeah, no, you know, we don't charge interest.
There are late fees if you don't pay, but that's not the same as interest.
You know, that's there like we bought a couch no interest for six months, so as long as you pay it off within six months. That sort of thing seems to be interest free.
But then when you look at the business model and you see that a significant chunk of the people are incurring these late fees.
Well, that's their fault, isn't it. That's human nature. You can't blame us if we take advantage of people procrastinating and not paying off their fees in time.
Well, it's not that they're procrastinating, it's that they're choosing between paying rent or paying this off.
So this is yeah, medicine exactly.
So this is coming back to it's the economic procarity stupid right. If people are in these dire straits, we should not be surprised that fintech firms are trying to capitalize on that and profit from it, which is why I think, you know, what we need are some kind of public safety nets to sort of make and to hire minimum wage and hire social security benefits.
Coming up, we continue our conversation with Professor Hillary Allen discussing her new book, Fintech Dystopia, a summer beat read about Silicon Valley and how it's ruining things. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio.
My extra special guest this week is Hillary Allen. She teaches at the American University Washington College of Law in Washington, d C. Where she specializes in regulation of financial and technology laws. So let's talk about the Digital Only book Ironic Right, Fintech Dystopia, where you describe modern financial technology simply as Silicon Valley ruining things. Explain that seems like an extreme example, and give us some examples of how Silicon Valley is ruining things.
So, just to be clear, not all modern technology is ruining things. There's a particular business model approach that I think is ruining things, and that is derivative in many ways of the venture capital model in Silicon adventure capital just venture, Okay, yeah, venture capital model in Silicon Valley. So it's sort of got thischene around it that's iconoclastic, and they make bets on these moonshots that'll save all of humanity and YadA, YadA YadA. But in fact it's
pretty well established as a play at this point. You know, there's a lot of subsidies that go to venture capital by virtue of their having access to pension funds by virtue of sort of capital gains taxation, and so they've got sort of and especially in low interest rate environments, they attract a lot of money, so they have pretty cheap money available to them. And then they go shopping.
And what they go shopping for is not the iconoclastic sort of outlier that we think of, but what we've seen and what the evidence shows is that they tend to go shopping for the same things that their friends are going shopping for, and they go shopping for the businesses that their friends have developed. And so there's this sort of very sort of insular mentality in what they're
looking for. And they're also looking for something that they can cash out of very quickly, because you know, the average venture capital fund has a ten year, sometimes twelve, but usually ten year duration.
That's really not that much.
Time to find something to invest in, have it grow, and then cash out, and so they're not looking for things that are going to take decades to develop. They're looking for things that they can grow quickly and get out of in about five or six years.
So give us a few examples. What do you think is the sort of you know, not adding a whole lot of value venture backed businesses.
So not intentionally, but it just turned out that way. As I wrote this book, almost every fintech business I looked at had been funded by Andresen Horowitz.
They had been sort of the lead. So you know, they they're.
The hot VC these days. I've full disclosure, I've interviewed Andresen, I've interviewed Kapor, I've interviewed Horowitz. So I've sat with them and talked about a lot of their businesses. But the past few years they've been very front and center, very active.
Yeah, no, and they sort of they have their as a markete name. As you said, they're the hot vcs. Once they say they like something, they can basically attract other venture capital to those businesses. And so they're essentially taste makers.
Which which is fascinating you say that, because before that it was Sequoia, Before that it was Kleina Perkins, Like you work your way, there's a hot firm for a decade. The nineties had it, the two thousands out at the twenty ten's had it. They tend not to maintain that position forever. Although to Andres and Horwitz's credit, they've been the it girl for a good good run so far.
Yeah, I mean I wouldn't say that that's a good thing, but yeah, so you know, they they basically built the crypto industry. So you know, the narrative around crypto is that is this organic sort of community of cyberpunks and libertarians, but they really built that industry. They were early investors in coinbase, that was their first crypto investment, and then they have plowed a lot of money into the industry and it's sort of their seal of approval has been
what's attracted people to it. And you know, part of what Andreeson Horowitz does is it doesn't just invest, it's does aggressive marketing campaigns for the things that they've invested in, aggressive lobbying. So they've really been at the forefront for trying to get the laws changed to accommodate their business models. So, yeah, there's there's crypto, but they've also been at the sort of the forefront of.
I always there's one of the do not pace. I think it's a firm that's theirs. I always get get mixed up.
They they were very early investors in Robin Hood, the fintech trading stock app.
Which originally started out as a stock app and then it became eventually a crypto app, and now it's a been on anything app.
Yeah, and again that is a company that, by the time at iPod, had wracked up all kinds of fines from the SEC and FINRA because it was violating laws left right and center.
You know, it's.
It was one of the first to offer commission for brokerage. But as the chestnut goes, if you're not paying for the product, you are the product. And it makes most of its money from payment for order flow and was not clear with its customers in the early years about that how that was going on, and how that they get paid a lot more for your options trades than your regular stock trades because more profitable, Yeah, more profitable for the citadel securities of this world to take those Yeah huh.
Really kind of interesting. And yet at the same time, you have a chapter in your book Silicon Valley Welfare Queen explain. I thought that these are you know, Ain Randian libertarians that don't want to suckle off the teat of big government, and these are people that are builders and self made people. You're arguing not so much.
Well, they don't want us suckling on the teat of the state because they might have to fund that with taxes.
But they're okay suckling themselves, right, So.
Give us a few examples what companies started out as welfare queens.
Well, I mean, again, the whole story of tech, the Internet and smartphone boom is very much based on technologies developed by.
The government, DARPA and the whole Internet exactly.
And you know, and I think if you look at the iPhone, a lot of the individual technologies that went into that again.
Came everything with microwaves comes out of NASA, right.
So you know, first of all, this entirely self made story falls apart right there, because, as I mentioned earlier, if you've only got six years to turn around to technology, you're not really investing in prototypes, in thinking really hard about physical hardware and how that works. You're really looking for a software thing that you can gin up pretty quickly.
And so the really low long term investment comes from the state and has always done, and then it's commercialized, you know, And I think that that sort of has worked well, except that you get to the point where the venture capitalists who are commercializing are saying, well, we shouldn't have to pay any taxes to fund the state that develops these technologies. They also benefit, as they said, enormously from laws that they lobbied for in the late seventies.
I believe changes to ARISA, which allowed pension funds to venture to invest in venture capital, basically didn't exist before. And at that same period they were lobbying for changes to the capital gains taxes.
Well, you have the carried interest loophole exact continues to persist. I'm drawing a blank on the author's name. There's a book Americana four hundred Years of Technological Innovation that makes the argument you're making. Go back to the telegraph funded by Congress, go to railroad. Like every major technological innovation or most major innovations got seeded with the government, and
then eventually the private sector takes over. And what has changed in recent years is that public private partnership seems to have broken.
Yeah.
Actually so, the book I really like on this is Margaret O'Mara's book, The Code Who Does?
She does a great history of Silicon Valley, and yeah.
I think the the understanding that there was a quidber quo has sort of fallen away. So always the private sector has commercialized this technology. But if we have an unwillingness to sort of pay any taxes, if we have an unwillingness to invest in government capacity to invest in universities where so much of this stuff is developed, you know,
you take Mark Andresen. He he got his start because he was happy or sorry, lucky enough to be a student at the University of Illinois at the time where they had a special grant to look at the beginnings of the internet. He worked on a team there that developed a prototype internet browser, and then he went into the private sector and they let him build one from the private sector, and that was Netscape, and that's how
he made his fortune. So he was sort of in the right place at the right time to take advantage of public investment in this kind of thing. And yet this is the kind of thing that we're seeing that these leading venture capitalists want to shut down.
Really interesting, since we've been talking about books, you've criticized Abundance, which is by Derek Thompson and as recline as the whole concept of abundance is sort of a sexy way to make excuses for techno solutions to tell us a little bit about that.
Yeah, so this is something I get into a lot of conversations with people these days because I think there are some elements of the original sort of abundance agenda that are very appealing to people in terms of, for example, increasing housing capacity. And I do think that that is something that needs to happen and has to be done in the right way. But if you look at who is funding the abundance movement, they have conferences, et cetera.
It is Andreesan Horowitz and other people from Silicon Valley, and it seems to be this attempt to essentially put a happier face on the deregulatory project that Silicon Valley is looking for, to sort of make it seem kinder, gentler, and more progressive, because the abundance movement is sort of in a nutshell, is supposed to be, well, we shouldn't have artificial scarcity, we should build more of what we want to do, that we should take away some of
the roadblocks that are getting in our own way. And when you say it like that, it's sort of hard to disagree with, Well.
That works for housing, you have nimbiism with housing, but when you take that away, it also means you're going to end up with perhaps high rises or multi family units in a suburban area that some people don't want in their neighborhood. There's always a series of trade offs with people who are already there versus people want to get there. What is the specific problem with abundance as a philosophy towards building more of what we want as a society.
Because it's who gets to decide what more of what we want is. And if you look at who's funding the abundance agenda, it is the billionaires and the tech elite. And these are people who have really shown that they are quite willing to run roughshod over regulations that are there to protect the public from harm if that enables them to profit. And so I am just skeptical that a movement that is funded by these people is really going to be prioritizing the kinds of projects that would
benefit the economically precarious. I think it's more likely that there'll be benefiting themselves and will lose protections for people with less voice that are currently in place.
So what sort of overhyped products do you think best explain the problems with this approach, like what are these companies putting out that either is a result of regulatory capture or just don't do what they promise, Because you would think that in the world of venture either your product finds an audience, it finds a customer base, or it doesn't and fails and that goes out of business.
Yeah, so that's sort of the perverted part of this is that that market logic, like you know, survival of the fittest, because of all the subsidies that benefit venture capital, that doesn't really apply that logic anymore.
So, you know, give us an example Crypto.
Crypto should have died many times already, particularly it should have died in twenty twenty two when we had the crypto winter. At that time, particularly Andresen Horowitz. Crypto had this huge war chest of funds that they had raised, and they stopped investing in crypto startups at that point
because you know, everything was maribund. But what they started using that money for was lobbying, political spending, and they really worked very hard on members of Congress to essentially create laws that would allow the crypto industry to keep doing what they're doing, which was not allowed under the securities laws as they were, so the whole business model
was regulatory arbitrage. They wanted laws that would sort of give a patina of legitimacy and hopefully encourage institutional investment, attract more money to the space, but not actually make them have to. For example, like coinbase combines the functions of a broker dealer and in exchange, that's not allowed in securities.
You can see why. Therese all kinds of conflicts of interests that coright.
Either you're in exchange or a brokerage firm, not both.
But in crypto you're both, right, And so if you applied the securities laws to crypto, they would have to disaggregate and basically would probably destroy their business model. So what they wanted was a law that said, no, it's fine crypto special you do both.
And so that really.
An industry that should have failed, is you know, again rising being propped up all through this sort of aggressive political spending. And I mean I've talked to people in Congress off the record who have said that they've only voted for these laws because they're afraid that if they don't that crypto industries will target them.
What other products do you think are overhyped and fail to satisfy their markets?
Well, right now, the obvious answer is a lot of the AI products, the anything sort of. It's hard when you talk about AI because it's such an umbrella term for so many different things.
Right, I have perplexity on my phone. It does a better job with search than Google. Does I get better more comprehensive answers? What's wrong with AI?
Well, let me disaggregate it first, because there's plenty of AI that there's nothing wrong with. Right, So, AI is not intelligent in any way, shape or form. It's a market that's a marketing term. What is it is is it's an applied statistical engine. You have an algorithm that looks for patterns in data and then acts accordingly. And that kind of technology has been around for a long time. It does like, for example, it's great for fraud detection
in a bank, for credit card transactions for example. So that that's you know, that's that's an a plus use of AI. But the last few years, everybody has been pouring everything they've got into these LLM based tools, these large language made model based tools.
So these are tools that can.
You know, old AI tools would just sort of classify something, put something in a group, or predict something. But now we have these tools that generate content, particularly text.
But also you know, video, music, et cetera.
And there are so many problems with this technology because it's being sold as technology that can replace humans, right, that can Basically it's worth throwing trillions of dollars into this because of the productivity gains that we'll get by firing all the humans. Essentially is the story they're telling. First of all, that would be great.
Right, that's a problem in and of itself. The way I have heard it described that's a little less catastrophic, is this is going to make everybody more efficient, more productive. It'll make companies more profitable, and we'll all be able to do more with our existing stayoff than having to go out and hire hundreds of more people.
But that is not true, sadly, that's the pitch line.
Right, So, these these tools make a lot of mistakes, you know, even the very best ones make mistakes.
We've seen a lot of attorneys. You and I are both attorneys. A lot of judges have been calling out attorneys who theoretically are supposed to be doing this on their own and instead are outsourcing it to AI and all of its hallucinations and citing cases that don't exist. The assumption is that's going to get better eventually, but it won't.
So this is this is the problem, but it won't. But it won't.
So these things are statistical engines, right, They they can't check for accuracy because they don't understand accuracy as a concept. Right, there's no reasoning it's it's literally the most statistically most likely word after the last word I gave you is this word. There is no way to make that care about accuracy because it's it's not a it's not a thinking machine. And I think there's increasing acceptance that these models have hit a wall and they are as accurate as they are going to get.
Really, yeah, that's kind of fascinating. My concern was, at least on the legal side, Hey, you have this existing body of work and all this research and brief writing and arguments that exist as of now. If you're going to replace people from doing that, are you're going to freeze the state of legal knowledge at twenty twenty six and five or ten years from now. If you don't have people writing these briefs. You don't have people writing
these decisions. How can AI respond to what's taking place over the past ten years if we don't have the humans actually doing the grunt work.
Yeah, I mean there's a there's I mean, I think those kinds of concerns have been expressed very much in the cultural context.
You know, if we disincentivize.
Creators from making new music and new aret or is this it?
Are we stuck with with what we've got with something like the law.
One of the challenges is that you know, these large language models, they don't get updated on a day to day basis. You know, there's there's sort of a stop point, and then they don't know well, they don't know anything that they don't have the data from after a certain date, So that that's a limitation. But the thing I worry most about with the law is that you have to be able to spot the hallucinations or you're going to
get yourself in very big trouble. And I think this is true for a lot of different feels in and this is again just to digress a little, why the profitability narrative is not true right because the only place where you can just put this content out and just leave it there is in very low stakes places right where it doesn't matter if you get something wrong. But even you know, things that you wouldn't think are such a big deal have proved to be quite high stake.
So Air Canada had a chat bot that told a customer that if they wanted to apply for a bereavement discount for a flight, they could do that after their flight was done. Now that's not Air Canada's policy. You had to do it in advance. And so this customer tried to get their refund after the fact, and Air Canada said, well, the chat buck got it wrong, too bad, So sad for you, and.
It's your chat bought you own well responsible for it exactly, yet not my mistake, your mistake exactly.
And so even in these sort of reasonably low stakes customer service interactions, there's reason to be really worried about inaccuracy. Now you start dialing up to things, to medical advice, legal advice, you know, it's just you can't rely on them. And I worry that we're putting people in a very difficult position because it's a lot easier to get something right when you write it yourself than it is to find mistakes in something so some one else is put together.
So let me push back a little bit, because I've been watching the AI reading medical scans, and at some point last year, when maybe it was two years ago, the technology theoretically past the accuracy rate of humans, fewer false positives, more identifying missed negatives that should have been positive than people. Is that not accurate or where are we with the medical application of that?
So this is why I think it's so important to disaggregate the different kinds of AI, because that is not sort of LLLM based AI. And as I said, some of those tools are great. I can't weigh in on medical imaging and things like that, so it may very
well be the case. What I'm talking about is, you know what, if you've got you know, a doctor coming up with instructions for a care plan for their patients and they let the AI do it, right, if there's a mistake in there, they're much less likely to catch it. If the AI, because you know, you know how things go, you'll be expected to look at more of these because you're not generating them yourself, right, And it's always easier to get things right when you do it yourself than
when you're reviewing someone else. I mean, when we were lawyers, we used to That's why you want to have the pen on contracts. You want to you want to hide things from the other side. And now it's now it's the AI hiding stuff from you. And I worry that, especially with younger lawyers coming up through the ranks who are encouraged to rely on these tools from the beginning, who won't actually develop the skills because you don't learn
well when you sort of don't process it yourself. So if you're spent your whole career using AI, you're not going to be able to spot the problems.
In the AI and not can have the skill set.
No, And so then I'm worried about, you know, those young lawyers getting sued from malpractice because they missed something that the AI generated, but they were never even given the opportunity to learn how to spot it themselves.
It's a problem with the wrongs on the ladder being removed, especially we see that now manifesting itself. The unemployment rate of the under thirty is about double what it is for the national unemployment rate. And I can't help but wonder how much of that is somehow related to the proliferation of AI tools for white collar job.
I think, you know, Corey Doctor, who does a lot of work in the tech space, has a great quote on this that I'm going to butcher a little, not say it quite as well as he does it, but he said, the AI can't do your job, but the AI salesman can convince your boss to replace.
You with AI that can't do your job.
Right, So it's I think you're right that there is at this moment, you know. I mean, it's also hard to say how much of this is a AI washing as a post to real AI displacement. Right the economy's not in a great place right now. People don't want to hire anyway. It looks a lot better if you say, well, we're not hiring because we're replacing them with AI, than just we're having a rough time we're not hiring.
AI washing is a phrase I haven't heard used in modern parlance yet, but it certainly makes a whole lot of sense. The line I heard, and I don't know where I'm stealing this from, is you're not going to be replaced by AI. You're going to be replaced by somebody with a greater facility working with AI than you have, and it sort of creates a self fulfilling arms race to make sure you learn how to use that tool. Otherwise you're at risk for being replaced by somebody who knows how to use that tool.
I've heard that too, But I don't think these tools are that hard to use, right, I mean, that's a failure on the part of the AI companies if they're so hard to use, right, It wasn't hard to use Google.
Search Perplexity and even chat GPT is absolutely easiest part I use, don't. I don't find them difficult. Sometimes you have to keep changing the prompts to get an improved answer. Like if you just ask a question and walk away, well then you're getting what everybody gets. But if I don't really buy into the prompt engineer job title, but a little exposure is the more you ask it and the more you vary it, you get a variety of answers and eventually you come up with something, Oh that's
interesting and different. Let me take a look at that.
So, I mean I have strong feelings about this as an educator, because if these tools are worth their salt. It shouldn't take our students long to figure out how to use them, right, right, So why are we bringing them into education where what they really need to learn is how to spot hallucinations, how to think critically, so that if they are going to use these tools later, they can use them to the best of their abilities.
This whole arms race.
Sense of well, they need to use them in school so they don't get left behind. I'm like, it didn't take learn long to learn Google.
They'll be fine.
You've been pretty critical of things like crypto and stable coin. We're going to get to those in a moment. I want to talk about some other things you've discussed. You've brought up the whole idea of technology as a branding exercise, phrases like democratizing finance, disruptive technology, banking, the on banks. You've described these as just you know, marketing and not really accomplishing anything. Tell us a little bit about those and give us some examples.
Sure, I mean, I think at the heart of all this is innovation speak in innovation worship, right. We alluded to that earlier, This sense that anything that is innovative is inherently good and must therefore be permitted at all costs, and that is sort of the font of a lot of the rhetoric and narrative that we get out of Silicon Valley that ultimately is there to attract funding, yes, but also to procure legal treatment that facilitates what they
want to do. It actually creates offen an unleveled legal playing field where you have the incumbents who have to comply with all the laws, and then the disruptors, as you say, who don't have to comply with all the laws and can succeed on that basis even if their product isn't superior in the way we would typically expect
a disruptor's product to be. So yeah, I mean, disruptive innovation goes back to Clayton Christiansen and the innovator's dilemma, This sense that if you stay still and just make good products, you'll be out competed by someone who is trying to do things a little differently. But you know, there's no real formula that you can take away from that as to what disruptive is in the of the beholder.
So let me push back on that a little bit. And all my VC friends, I could just hear their voices in my head, and the pushback is, Look, most new companies fail, most new technologies crash and burn, most new ideas never make it. And even the best of the best vcs, they'll make one hundred investments for that one moonshot that works out, and most of the other ninety nine are at best break even but mostly losers.
How could you say this is true? Oh? And real innovation often finds itself in between the regulatory regime because the technology that's being created was never anticipated by the regulators or anybody else.
Fair pushback a lot of points that I would quibble with. There something that's fair. Quibble away, quibble away. All right, So.
There's this idea that the law is a bat innovation because law is old and innovation is new, and the law couldn't possibly have contemplated the innovation. The story about the innovation is what makes it new. Right, most of the things that we're seeing in the fintech space, they're not that new. Right, As I said, you know, we've got fintech lending has a lot of the things that we didn't like about payday lending. Right, why shouldn't the
laws from payday lending apply crypto basically. I mean the crypto markets for all the world look like the stocks and bonds and the unregulated markets of the nineteen twenties.
We saw how that ended.
They ended in such a spectacular crash that we ended up with the securities laws. Why shouldn't they apply? What's so different? Right, So, this construction of novelty is something that is done intentionally as a narrative. Now, I fully appreciate that we need the optimists in this world who are going to try new things.
And I say that very early on in the book.
The people who these stories are you because they attract funding two new things. So I'm not saying we should do away with it completely. My argument is that the yin and yang, the balance between the optimists and the realists, is badly out of whack because we give so much deference to the stories about innovation, about disruption, about how technology can solve problems that have been with us for centuries. We can magically get rid of intermediaries now with blockchain technology, apparently.
Well, that was one of the story narratives, was this intermediation until it no longer was the story. But let's talk about some specific companies that you've mentioned, that you've written about, and I want to get your sense on it. And the oldest one was PayPal to this day, and I was a PayPal user back in the nineteen nineties, with eBay and those sort of things. To this day, I don't understand what they did was any different than a credit card, other than being a bit of middleware
that eventually became a rentier. Why not just use a credit card? Why do I need PayPal between me and Amazon or me and eBay.
So this is really an interesting story, and I learned a whole lot about this in research for this book by reading Max Chafkin's book The Contrarian about Peter Tiel and the start of the beginning of PayPal. And in fact, the idea for PayPal came from the same place that the idea for crypto has come from, which is this techno libertarian idea of we don't like regulation, we don't like central banks, we would like to have private money, and we would like technology to help us have private money.
And PayPal wasn't the only one of these kinds of startups back in the early dot com bubble.
So PayPal, I.
Think succeeded because it sort of lucked into this deal with eBay, as you said, right, it sort of had no distinguishing features as far as I can tell, that made it any superior to the beans is and the fluses of this world. It lucked into this deal with eBay, so.
And eventually they buys them to solve their I guess credit card management problem. I don't really understand. I still, you know, twenty or twenty five years later, I still don't understand why they were necessary.
I think. Yeah.
I mean, my knowledge of this comes primarily from reading Max Chafkin's book, which I highly recommend. But that's that's my understanding too. And so you know, they are a payments technology. I too struggle to sort of understand what they offer that a credit card doesn't in many ways.
One thing they are, though.
Is they are sort of the or regulatory arbitrage story in fintech, right, So you know I've said so much of fintech is actually about arbitrage in the law rather than technological superiority. PayPal from the beginning was flaunting quite aggressively the banking laws because only banks are allowed to accept deposits, and people were keeping money in their PayPal wallets and for all the world, that looks like keeping
a deposit. Peter Tiel from the beginning was very aggressive on the lobbying to make sure that that was not considered deposit taking. Early on there were multiple states that were investigating it because they thought it was the unflawful taking of deposits. He lobbied heavily in Congress, and lobbied heavily at the FDIC, and ultimately, you know, that worked. And so I think that has sort of been the prototype,
that blit scaling prototype. I think people perhaps underestimate the degree to which blit scaling is really about playing it on an unlegal, unleveled legal playing field.
Let's talk about stable coins. What sort of value do they provide?
Again, unless you are trying to do illicit transactions or gamble, not a whole lot, right.
So, well, stable coin is worth a dollar, and it promises to always be worth a dollar. Don't we have dollars? Why do I need a stable coin?
Well, you need a stable coin often to do illicit payments. So if you want, you know, if you're they're very popular, for example, with all kinds of dark cartels, and they're good for sanctions of Asian.
They're also very good if.
You want to gamble in crypto and you want to use it as sort of a cash management tool in between crypto investments, kind of like a money market mutual fund in your brokerage account for parking funds in between crypto gambling. But they've really never had any utility in any big way as a legal payments mechanism.
All right, So what about you mentioned the blockchain. I keep reading that blockchain is going to allow us to use smart contracts and have things happen automatically that now have to be manually. What's the problem with blockchain?
Well, first of all, smart contracts can work without a blockchain. Smart contracts pre date blockchains. They can run on all kinds of databases. So if you want that kind of functionality and it has pros and cons, and I've written about this aton, you can have that without a blockchain. The reason why you don't want to have it on a blockchain, and this is something that does not get anywhere near the attention it needs, is that there's all
kinds of operational risks associated with the blockchains themselves. So blockchains are software, they are maintained by in the case of the Bitcoin blockchain, just a few individuals. In the case of the Ethereum blockchain, it's the Ethereum Foundation. They're not regulated at all. They have no obligation to invest in cybersecurity, to invest in getting their blockchains up and
running again. Should something go wrong, You're just you're really sort of as I sometimes say, yolo ing operational risk with regards to these blockchains. And so if you want smart chain, so sorry smart contract functionality, don't use a blockchain.
Huh.
Coming up, we continue our conversation with Professor Hillary Allen discussing her new book, Fintech Dystopia, a summer beach read about Silicon Valley and how it's ruining fits. I'm Bury Ridults. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Riddults. You're listening to Masters in Business on Bloomberg Radio.
My extra special guest this week is Hillary Allen. She teaches at the American University Washington College of Law in Washington, d C. Where she specializes in regulation of financial and technology laws. So we mentioned stable coin, we've mentioned blockchain. Is there any value in any of the crypto coins? Be it bitcoin or ethereum. I know, we can't actually describe the last one hundred coins that are out there on the radio will violate George Colin's seven words you
can't say on TV or radio. But there's an outside of the you know, ebu, doge coins and everything below that. What's the value of the first five or so cryptocurrencies? Is there anything worthwhile to these or is this just a solution in search of a problem.
It's a solution in search of a problem. I mean essentially.
Even so, Bitcoin often is seen as the most credible of these because it's been around the longest and has large Bitcoin and.
Eth those are the two I hear about the most.
But both of them are essentially ponzi's in the sense that there's nothing backing them. The only reason they have value is because someone else might buy them from you. If they choose not to, it could go to zero. And actually, someone put it to me this way. It's not that they could go to zero. They could go to less than zero because they don't even have any assets that could be used to administer a winding up right, and and that's expensive.
You know you're gonna get the lawyers.
In the courts that everybody involved that tho, Well, you're not suggesting that if you own bitcoin you may have a liability down the road. Is that? Is that the implication?
No, I'm just saying that if someone was trying to work out the end of one of these things, there wouldn't even be you know, office furniture you could sell to pay the lawyers.
Okay, you you've written about startups like farrahos I remember juico tell us a little bit about those two, and was that just, you know, one of these products that just didn't work out? What what's the problem with that technology solution to our juicing problems?
So Juiceara is just my favorite metaphor for all of this. So for those of you who are unfamiliar with the gift that is Juicero. So basically, this was a machine that cost hundreds of dollars.
It was Wi Fi enabled.
Well, roll back the guy and you described this in the book. The guy who invented this previously had set off a fairly successful was it a juicing chain of companies that got bought, and so he had some credibility in the space. And now I'm not going to run restaurants. I'm going to create a technology that people can juice at home.
It was venture funded. They put a lot of money into.
This, one hundred plus million dollars and these these.
What it did was it squeezed these juice patches.
The problem was that people could just squeeze the juice patches with their bare hands and get all the juice.
There was a notorious Bloomberg article of about out this, but it raises the question did the company already squeeze the juice and put in these pouches? Why didn't they, Like, why wasn't this set up so that you can actually put fresh fruit? Like doesn't it defeat the purpose if you're buying pouches? Or was the whole idea of the razor blade model?
So, I mean, the reason why I love this as a metaphor is it really gets at this techno solutionism, which is one of the concepts that I'm really coming for in this book. And techno solutionism is this idea that everything in our world can be reduced into a technology problem, and that the only reason we haven't solved certain things is because we haven't spent enough time and money on developing the technology. And what that does is it sort of flattens some problems into it gets rid
of the human messiness. It flattens problems, It ignores domain expertise. People who've been working in particular fields for a long time and know a lot of non tech stuff. It sort of dismisses their expertise. And sadly, you know, there's just this magic associated with technology at this point. And as I said, I'm not anti technology. A lot of it's great, but it doesn't deserve the level of sort of magical deference that we give it. It can't solve all
our problems. And when we get into this mindset where we think that if we throw enough money at technology, it can solve anything and it will always be the best solutions, we end up squeezing pouches with a machine that we could squeeze.
With our bare hands.
And a joke that I try and make in the book is like with AI, we may be better off squeezing things with our bare minds.
So one more company I have to ask about Farahose. I love the book Bad Blood, what really went into details about how corrosive and co opting, co opting the company itself was for everybody around it, including the attorneys and all sorts of other bad actors. Why wasn't thereno It's just an idea that didn't work. That you can't if you want to draw a blood from a vein, you have to draw a blood from a vein. You can't just prick your fingertip and think that's going to be the same as venal draws.
Well. So that's the thing with this techno solutionism. It presumes that everything is a tech problem waiting to be solved. It doesn't even countenance the possibility that there may not be a technological solution for what you want to do, that the technology you want may not be able to do the thing you wanted to do. And when you have that sort of collective sense, though, I think we have now that if we throw enough money at any technology,
it can solve any problem we give it. You can see how people get so susceptible to being sort of drawn into the stories that outright con people like Elizabeth Holmes might be telling, but also the stories that we're being told about.
You know about.
AI right now, about crypto. You know, the more you know about these technologies, the less impressive they seem, and the more clearly it becomes illuminated that they just can't do a lot of the things that they're going to do. But that's so counter to how we typically talk about technologies that it sort of it feels a bit weird to talk like that, and you sort of you're going
against societal norms in a way. And so one of the things that I really wanted to do with this is to start making it easier to talk about these things critically, to be not such an outlier to express your frustrations. And I think we're actually having a moment like that about AI because so many people really hate it.
Really, so you use the phrase techno solutionism, and Fairhos is really the poster child for that. Because as you're describing a lot of these things, I am recalling the story, especially what you're referring to with domain expertise. She had no medical or medical device training. None of the vcs who put money into Fairnose were healthcare, biotech medical devices
like they all passed. Eventually, she hired a number of people to try and with some background, but they seem to turn over pretty quickly because now you can't do that what you just pricking the skin, You're getting all the interstitial tissue and fluids, and you're corrupting the sample that you want to test for something you have. The reason we draw from the vein is very medically specific, and yet it attracted Henry Kissinger and the all sorts
of big law firms and everybody plowed in. She's the next Stieve Jobs, the youngest self made female billionaire. Is about us, that we're just so susceptible to buying into these narrative twels that turn out to be nonsense.
So, I mean, part of it is that we're humans, and humans have often sort of been snowed by things that are flashy and shiny and exciting. I mean, that's just very much the human condition. Some of the stuff I talk about in the book that I really enjoyed working on was the cognitive psychology aspects of it.
You know, sort of.
When we hear certain stories, it's very difficult to budge ourselves.
And be contrariant.
And as I was saying earlier, so you sort of need a collective tipping point where people start to question it so you don't feel like an outlier or the norm when you start to question these things, and so I think there's a role for media here. I think there's a role for education. Unfortunately, the people who benefit from technically also know this and have a very big media presence and invest a lot in education. So it's an uphill battle to start talking about these things differently.
But you know, ultimately we are all human and it's nicer to believe that something will succeed than that it will fail. I mean, you might not think I'd be much fun at cocktail parties.
Although I am.
And the book is available for free at Fintech Dystopia dot com dot com. Let's jump to our final questions, our favorite questions we ask all of our guests, starting with tell us about your mentors who helped steer your career.
So my first mentors probably my first law firm partner boss in Australia, Stephen Kevinnagh, and I had thought I was going to be an ip lawyer, but we had a rotation system and we ended up and I ended up in his financial services practice and he was just a wonderful person to work for. It was a time when the law had just changed in Australia and he really was willing to hear what I had to say about this new law, and so it was just I
just felt very invested in and that was lovely. And then I think as an academic Patricia McCoy, who I adore, sort of, I have had a very non traditional path to academia. I had more practice experience than is usually the case. I had fewer of the bells and whistles
credentials that people usually have. And again, she just saw in me someone who was really passionate about preventing financial crises, about sort of systemic risk, and sort of was willing to look through the fact that I wasn't as polished as most of the other people trying to enter academia and support me, and I was very grateful for that.
We've talked about a run of different books. What are some of your favorites? What are you reading now?
Oh, I was an English lip major, so I have a many favorites. I'm very into the dystopian track, so Handmaid's Tale nineteen eighty four. I just finished the Parable of the Sewer in that Vein, which was parable of the Parable of the Sewer Octavia Butler. I also have always had a soft spot for really good children's literature, So Philip Pullman's Dark Materials trilogy is one of my favorites.
And right now I'm reading with my kids Catherine Rundell's books Impossible Creatures and The Poison King, and it's just they're just so good. And then work wise, I've just started Jacob Silverman's Gilded Rage, which is very much on point for the conversation we're having Gilded Rage.
You know, we talked about a few crypto related books. Did you see Zeke's number go up? It really is just an astonishing, astonishing work. What sort of advice would you give to a recent college grad interested in a career on whether it was law, financial technology, regulation, what's your advice to those people?
It's a really hard time for them. And I talk to my students a lot about the careers, and you know, things are the ground is shifting under our feet, and in this time of uncertainty, really it's really hard to figure out what to do. So I would recommend investing in the fundamentals, and I think it's hard to do when AI is being pushed, but becoming a good communicator, learning how to write and speak to people clearly will never I.
Think, go out of fashion. And investing in relationships.
Again, we're in this time where everything is sort of becoming technologized and atomized, et cetera.
But in my career, having good.
Relationships with people, and I'm pretty sure you'll agree with this has been one of the most successful things that has helped me along the way. And so just investing in personal relationships I think is always good advice.
Final question, what do you know about the world of fintech? Investing? Regulation today might have been useful twenty twenty five years ago.
Honestly, I'm not sure that there's much because the world was very different twenty to twenty five years ago. You know, I always just invested in in index funds basically, and you know, and that worked out frankly great, really well. The challenge is, and I study financial crises, the challenge is that when things go horribly wrong, everything is correlated.
Everything is correlated.
All correlations go to one in a crisis, for sure.
And I think we're on the brink of a crisis.
When you say on the brink, days, weeks, months, years.
Ah well.
John Maynard Kaine said that the markets can stay irrational longer than you, and I can stay solvent, so I will never put a time.
Frame on it.
But I you know, all warning indicators are flat read at the same time as we are pulling back old regulatory apparatus, So I think it's safe to say we're on the brink of a crisis.
How could that ever go wrong? How could regulation unleaches the animal spirits? As long as we're talking about canes, it's all good. Perhaps not, perhaps not? Hillary, Thank you so much for being so generous with your time. We have been speaking with Hillary Allen, professor of law at American University Washington College in DC and author of the book available for free online, Fintech Dystopia, a Summer beach
read about how Silicon Valley is ruining things. If you enjoy this conversation, well check out any of the six hundred previous discussions we've had over the past twelve years. You could find those at iTunes, Spotify, YouTube, Bloomberg, or wherever you find your favorite podcast. I would be remiss if I didn't thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher Anna Luke is my podcast producer.
I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.