Who better to learn fintech from than the NASAA President, Director of the Alabama Securities Commissioner and Hofstra University Law School alumni Joseph Borg? I had the pleasure of sitting down with Borg for a lengthy discussion into what Millennials and Baby Boomers need to know about the fintech space.
#1: Technology Outruns Regulation, Always
“The crossroads between financial services and technology, ala fintech, is the wave of the future, and it’s here now,” said Borg. But, the one thing to understand, is that technology always outruns regulation.
Andrew Rossow: Why do you believe that regulation falls behind newer technology?
Joseph Borg: Fintech with all its great technology, time-saving, and convenience, has its dangers as well. We’re getting into spaces, e.g. cryptocurrency and ICO’s, 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.
While we are still considered a “cash-based” society, the fintech space is allowing individuals to move money and conduct trades across the world. By appealing to a younger market or even a more business-saavy environment, fintech drives costs down and increases the speed in technology. Bottom line is, technology increases exponentially, and the idea of geographical lines are no longer important.
Mobile applications like Venmo, Paypal, or CashApp, allows individuals to send money instantly to someone down the street, in another state, or even in another country. We are talking efficiency and gratification. In many instances, credit cards are becoming obsolete, because people are now resorting to using their phones.
With the emergence of new technology, the ability for laws or statutes that are aimed to protect the consumer to come about, is hindered. Why? Its exponential growth and fast-paced enhancements make it almost impossible for laws to constantly be updated. The creators of the technology understand it better than the regulators.
We are now at the stage where everything from simple payments, to securities, to loans and investments, to you name it—if it’s financial, it’s going to get done in a mobile space and technology and finance are forever linked.
#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.
Millennials At Most Risk for Fraud
Rossow: Why do you think the pulse survey reflected millennials being the most at risk for fraud?
Borg: The millennial generation grew up with technology. There is an inheritant 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. That’s what makes them at the most risk for fraud .
Rossow: 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.
Baby Boomers Are Next In Line
The survey next showed that baby boomers were next in line to likely be victimized by fintech fraud.
Rossow: Let’s talk baby boomers and why they’re just as likely to be victimized by fraud as us millennials.
Borg: Unlike millennials, who grew up with cell phones and other tech, baby boomers came across it later in life. They know it’s part of the younger baby boomers, as opposed to the older group. They know it’s useful and working, but they aren’t as sophisticated with the use of it as millennials are. Perhaps, they aren’t as “trusting” of it, as I mentioned earlier. Their weariness and lack of “savviness” puts them in the second most demographic group for risk of fraud.
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. 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.
At the end of the day, fintech isn’t bad. In the long run, like all new technology, it’s going to be a target base for fraudsters, until people educate themselves and familiarize themselves with the technology.
#3: Don’t Believe The Hype
This past year, we have experienced the hype surrounding digital money, e.g. cryptocurrency and initial coin offerings (“ICO”). Regulators have also focused their attention to this area.
Rossow: How do you feel about the mania that is cryptocurrency?
Borg: Let me tell you a quick story. I was recently in New York for an interview with CNBC, and as I was waiting in the lobby, I was looking at my phone, killing time. So what comes across my phone? A message—“guaranteed $13,000 profit in 24 hours in cryptocurrency. Click here to get started.” Now, for most baby boomers, and I suspect for millennials too, anything new in technology, always has some hype to it, especially if there’s money involved.
The cryptocurrency craze is no different than that of 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, as I just described, e.g. the “too good to be true” scenario.
Borg referred back to a pattern of trends over the years, outlining the development of hype and mania. In the 90’s, before the ‘tech wreck’ in the 2000’s, there were commercials on TV, where housewives were buying funds and talking about it at social clubs.
In 1999, you had the water cooler talk. Why? Online trading was new and IPO’s were coming out. Specifically, you had the “.COM” era—if there was a “.com” behind it, people were buying it. Did they understand it? No. Did they know what it did? No. All they knew, was that it was going to go up. So they bought into it.
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 whose anybody, who has no clue what cryptocurrency is, or blockchain, for that matter, are investing in it. Thus, frauds and crooksters are coming out of the woodwork.
Rossow: How does cryptocurrency fraud impact the baby boomers?
Borg: For those 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 is here to stay. It’s still a new system, and 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: Lawyers, Business Owners, and Investors: Watch the Red Flags
“When Mt. Gox first failed, I got calls the next day saying—‘I had those coins, can I call the FDIC and get coverage, because it was in a bank’ or ‘Can you help me out, I need to recover my bitcoin because it got hacked’—nobody understood what they were getting into in the first place. Some thought they were getting actual god, fiat coins.” –Joseph Borg
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 no guarantee that these ventures will survive or even be successful. For those that are, there’s a reason.
For those investors getting into the space, you need to treat it as you would any other investment. Evaluate it. The currency isn’t backed by the U.S. Government, it’s unregulated. If you lose it, there’s no legal recourse. Yet.
Rossow: What message do you have for investors or businesses investing in blockchain 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 potential cryptocurrency, down the road. Remember, it’s unregulated. Look at these countries where many of these cryptos are based—that should give you an idea of how things are, at least right now. You can look at the red flags, but 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. But big thing is are they licensed? Many of these fraudulent scemes are unlicensed individuals with unlicensed firms. If you’re approached as an investor, look at red flags you would like 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. We are now at the beginning stages of crypto—anytime there is something of a mania (tulips in 1600’s, .COM era, vacation real estate prior to 2006), it takes time.
The folks creating the tech, know more about it than the regulators, but it’s not a criticism against regulators. The next group are the fraudsters, as they make their living off of it and have to know the insides and outs.
It’s important to remember, that large, legitimate companies aren’t making these kinds of promises—they may be investing in fintech, but they aren’t guaranteeing high investments with low risks. They simply market services with minimum costs provided.
Rossow: How about lawyers who may be approached by clients looking to enter the space?
Borg: Let me give you the fraudulent scenario that we see most often, first:
You have a client that comes into your office and they tell you they are getting into cryptocurrency and want to start an LLC, and they want you as the lawyer to open an escrow account for them to guard the money. Something along the lines of–“We have new tech and algorithims, and we are starting a new currency and anticipate launching a new ICO. We are going to raise capital and we need you to help us manage this.”
Why go to a lawyer? Because, it provides an air of legitimacy. Now, the client happens to be the crook, and the lawyer is now the gatekeeper. As the gatekeeper, the lawyer is collecting money in escrow, and ultimately, they are promised a percentage of the company on the back end. Your client/crook informs you that they have their first deal, and they need a large sum of that money in escrow, transferred to an account in Hong Kong. Shortly thereafter, investors start calling you as the lawyer, asking for updates, because they haven’t heard anything.
This is the problem. We are now starting to convict lawyers who are acting as the gatekeeper to these crimes, most of the time facilitating a crime they have no idea they are facilitating. At the end of the day, they have a legal and fiduciary duty to protect their clients funds, but the issue is that a lot of the times, these funds are fraudulent.
Legitimate Scenario: Identifying Securities versus Non-Securities
Borg: Now, let me shift to the legitimate scenario. A month or so ago, I was in California, talking to National Venture Capital Association (“NVCA”) about Orange Silicon Valley, a telecommunications giant in Europe, Africa, and Asia, looking into venture capital issues out in Silicon. A lot of folks out there from Ripple and other exchanges, were talking about how lawyers miscalculated the scenario. They were finding ways where these currencies were not securities versus reasons they should be securities, ultimately, providing their clients with incorrect advice.
The SEC has already unleased an exorbitant number of subpoenas, so everyone is on notice. Everyone is on notice, and lawyers need to rethink this and do it right.
Rossow: 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 white papers being used—these white papers 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.
Rossow: Turning to venture capitalists, what would you tell them?
Borg: To venture capitalist looking at ICO’s—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 (rest of the time).
From One Hofstra Alumni To The Other
This interview was unique as it was a millennial speaking to an established baby boomer, who unlike most, understands fintech and securities, as he has served as the Director of the Alabama Securities Commission since 1994. What made it even more interesting, is the one shared trait we had—we were both graduates from Hofstra University, in New York.
Rossow: What message to you have for education institutions like Hofstra who are teaching Finance 101 and Economics?
Borg: While students don’t talk about this stuff at grade school, they are starting to talk about this area at a high school level. We need to implement this in the education system—to the point where folks go, “I heard about this, and I looked into it a lot more.” That may be just enough to saving them a ton of money and avoid losing their college education fund, down payment on a house, kids college education fund, and even retirement.
#5: The Digital Wolves of Wall Street
Fun fact—Borg formed a multistate task force, that eventually led to the arrest and conviction of Jordan Belfort, also known as “The Wolf of Wall Street,” for securities fraud and money laundering. The Alabama Securities Commission has a 97% conviction rate on cases it investigates.
Rossow: You’re also known for helping put the task force together to take down Belfort. Do you see future cases like his, in this area?
Borg: Absolutely. Anytime you have investment in any great, very geographical location, mixed with technology, cryptocurrency, and ICOs, these cases are in that neck of the woods. States have watched what Texas, Massachusetts, and North Carolina have done. At the right time, you will start to see similar potential task forces for wholesale fraud involved.
Right now, these cases are small enough, where a cease and desist letter is sent, and the fraudsters just shutter their doors. But, in the long run, we will see a lot more cases.
Rossow: What measures are currently in place that you are able to speak to on behalf of the Commission and/or other regulators?
Borg: NASAA now has a fintech group, studying everything and taking in data. There will be a fintech roundtable in the late spring, conducted via webcast to discuss the past year of events. But, as more of these cases come forward, we are going to see a lot more cooperation and collaboration on cases between the SEC and states, and CFTC and states, as well as other exchanges. You can count on that.