L12: Special Topics - FinTech

Question 1

What is FinTech?

Answer 1

FinTech is the combination of innovations in finance with innovations in technology.

Question 2

What are some examples of fintech?

Answer 2

• Cryptocurrencies (Bitcoin, Ethereum, etc)
• Mobile payments (PayPal, Google Pay, Swish, etc)
• Automation of bank services (ATM) beginning in 1967
• Telegraph linking Philadelphia and New York in 1840s

Question 3

What are some vague fintech descriptions?

Answer 3

• “inject technology and competition in the banking industry”
• “deliver the future of financial services today”
• “deliver technological solutions for your financial needs”

Question 4

How does fintech provide value?

Answer 4

1. Taxes
   - Software and apps help consumers optimize deductions (TurboTax, etc). Even if government lose revenue, it helps the system work in the way it way designed to work.
2. Transaction costs
   - Payment apps
   - FinTech lenders process applications 20% faster
3. Moral Hazard
   - Cell phone apps that monitor driving (car insurance)
4. Information asymmetry
   - Big data (such as real-time transactions and satellite images of traffic in the parking lot of big-box stores) lowers the information asymmetry between managers and investors
   - Robo-advisors that provide information and improve financial literacy

Question 5

What is a token and how is it different from cryptocurrencies?

Answer 5

A token is a (digital) medium of exchange meant for a specific marketplace/platform.
- Non-digital tokens: carnival tickets, arcade coins, Disney dollars
- Digital tokens: Vaultoro, Musicoin, WePower

A token is different from a cryptocurrency, which is a general purpose medium of exchange.
- Bitcoin, Ethereum, Ripple

Question 6

What is an initial coin offering (ICO)?

Answer 6

Investors provide financing to a firm in exchange for tokens (usually based on blockchain technology), which are pieces of computer code that controls the transfer of funds/goods/services between parties.
- Tremendous legal uncertainty and regulatory challenges

Question 7

What does Chod, J., & Lyandres, E. (2021) say about ICOs (diversification, agency, and information asymmetry)?

Answer 7

• Equity stakes are claims on a firm’s future profits.
• Tokens are claims on a firm’s future output (e.g. revenue).
• Tokens can help prevent the under-provision of effort (i.e. pursuing private benefits) because it reduces the fraction of tokens that must be sold (relative to the fraction of equity).

Question 8

What does Strausz, R. (2017) say about crowdfunding and how to mitigate associated moral hazard problems?

Answer 8

Crowdfunding helps resolve uncertainty about demand during the financing stage.
- Threshold rule is important (e.g. all-or-nothing).
- Payments beyond the required investment should be deferred until after the completion of the project to deter moral hazard.

Question 9

What does Lee, J., Li, T., & Shin, D. (2021) say about successful ICOs?

Answer 9

Examine 1549 ICOs from 2016-2018

Successful ICOs have:
- Average 2000 backers (wisdom of the crowd)
- Higher independent analyst ratings (certification) (Successful ICOs with low ratings are more likely to be fraudulent)
- Insiders retain more tokens (skin in the game)
- High initial subscription (information cascade)

Median underpricing 24%