Who better to learn about Fintech from than NASAA President and Director of the Alabama Securities Commission Joseph Borg? I sat down with Joe for a lengthy discussion about what millennials and baby boomers need to know about the fintech space.
1. Technology Outruns Regulation, Always
“The crossroads between financial services and technology, a la fintech, is the wave of the future, and it’s here now,” said Joseph Borg, Director of the Alabama Securities Commission. But the one thing to understand is that technology always outruns regulation.
The Merkle: Why do you believe that regulation falls behind newer technology?
Joseph Borg: Fintech, with all its great technology, time-saving [features] and convenience, has its dangers as well. We’re getting into spaces, e.g. cryptocurrency and ICOs, where folks take advantage of those who may not understand that technology quite as well, or put too much trust in that technology. As a result, they forget about security for their own personal well-being.
2. Not All Risks Are Created Equal
Recently, state securities regulators conducted a pulse survey regarding who they believed to be most at risk for fraud, underscoring why regulators in the industry need to stay vigilant.
The Merkle: Who do you think is most at risk for fraud in this space?
Borg: Definitely the millennial generation. Why? Because they grew up with technology. There is a [deep] trust in that tech, because that’s what they know, which is well-founded. But I think they also don’t have this “fear of loss of privacy,” and because of that trust, sometimes they don’t see the potential for fraud, whether it’s hype or not.
The Merkle: As a millennial myself, how do you see us taking steps towards appreciating the risks that come with this new technology?
Borg: It’s a matter of education. Chances are, you’re familiar with historical turndowns and problems in the past, but you haven’t seen it personally with regards to technology. For example, you may know about stock market crashes and housing bubbles, but you haven’t really experienced it with technology. Therefore, technology has a greater stature to your generation than other things.
The Merkle: Why aren’t baby boomers as attractive to fraudsters?
Borg: Fraudsters are attracted to the baby boomer generation simply because millennials are still in the process of accumulating money. Whether it’s building up a credit history, putting a down payment on a house, or even building up a stock portfolio, this isn’t as enticeful in comparison to baby boomers, who already have money in the bank and equity in their homes.
“Dollar-wise, baby boomers are a greater target to the fraudster than most millennials,” said Borg. It’s easier to be misled by fraudulent tactics, whether it’s receiving an email from the Nigerian Prince promising $25 million, to a simple phishing attack. These individuals fall for it and fail to realize they just gave away their identity.
3. Don’t Believe The Hype
We are in the center of the digital currency and ICO hype. But what are regulators saying about it?
The Merkle: How do you feel about the mania that is cryptocurrency?
Borg: Anything new in technology always has some hype to it, especially if there’s money involved … the cryptocurrency craze is no different [from] the housing boom. Before the stock market crash, everyone was flipping houses. Why? Because that was the market. It was the thing to do. The crypto market is no different. Where problems arise is when investors fall for the advertisement puffery, like the email from the Nigerian prince offering millions of dollars – in other words, the “too good to be true” scenario.
Now we are in the cryptocurrency space, and those smart enough to mine some of it back in 2008-2010 suddenly saw spikes. We have the same type of mania out there, where anybody who’s anybody, who has no clue what cryptocurrency is, or blockchain for that matter, [is] investing in it. Thus, frauds and crooksters are coming out of the woodwork.
The Merkle: How does cryptocurrency fraud impact the baby boomers?
Borg: [T]hose who are maybe a bit behind in their retirement savings, or whose house fell under water during the last crash, are being told that their money may not be around, that healthcare costs are going up, and that they are going to outlive their money. It’s the “we had a bust in the market, and crypto is going up, so maybe I should buy some. That’s where fraudsters come in, because the best frauds are ripped out of the headlines today. Anything fintech.“
For those getting involved in the space, blockchain tech is here to stay. It’s still a new system, and it may not be as unhackable as people claim. So what’s Borg’s message to anyone investing?
If you’re really geared for this, and you think this is something you want to try—once you do your background, if you want to invest, take your money and say to yourself, ‘If I went to Vegas today, and put this on one bet, red or black, and I bet red, and it came out black,’ could I walk away and say, ‘Oh well, that was fun,’ and go to sleep at night? Can you still sleep at night, knowing you lost it? If yes, then no problem.
4. Don’t Put Your White Flags Up Yet
When Mt. Gox first failed, I got calls the next day saying—requesting the FDIC’s assistance because their ‘funds were in a bank’ and their ‘bitcoin accounts were hacked.’ Nobody understood what they were getting into in the first place. Some thought they were getting actual gold, fiat coins.
The problem with the cryptocurrency market today is that people simply don’t understand it. How can they? They look at a whitepaper that seems like the perfect outline of what it will do and what it could do. But focus in on those keywords—will do and could do. There’s no guarantee that these ventures will survive or even be successful. For those that are, there’s a reason.
The Merkle: What message do you have for investors or businesses investing in blockchain tech and in the crypto space?
Borg: You have to be weary of anyone promising high returns. Right now, every bank is investing in blockchain, and potentially cryptocurrency, down the road. Remember, you can’t guarantee high investment returns, because by definition, high investment returns means more risk. There’s never a guarantee they will increase in value. If you’re getting an unsolicited offer from someone wanting to do it, be weary of it; if it’s too good to be true, it is. More importantly, are they licensed? Many of these fraudulent schemes are unlicensed individuals with unlicensed firms. If you’re approached as an investor, look at red flags you would look at for any other type of investment.
Fintech is here to stay, and it will take time to sort out the development of new tech and the regulations that surround it. “Like mutual funds when it first started, it’s going to have to get sorted out, because nobody understand it,” said Borg.
“The folks creating the tech know more about it than the regulators, but it’s not a criticism against regulators,” explained Borg. The next group to be in the know are the fraudsters, as they make their living off of it and have to know the ins and outs.
5. Do It Right
The Merkle: Can you expand on what “doing it right” means in your world?
Borg: Register the currency as a security, get a broker dealer involved for the sales aspect. Consider the rules with respect to disclosures, and the whitepapers being used—these whitepapers are the preliminary to a disclosure statement. Think about it, it’s 40% of the disclosure statement being used. Now just put that with the risk factors.
The Merkle: Turning to venture capitalists, what would you tell them?
Borg: To venture capitalists looking at ICOs—use lawyers who understand tech, but also hire lawyers who understand securities law and commodities. Otherwise, you’re going to fall under either securities (most of the time), commodities (a lot of the time), or money transmission laws (the rest of the time).