With the Australian Securities and Investments Commission holding its annual forum on Monday with a heavy emphasis on technology on the program, Professor Yermack said when he's asked about jurisdictions most capable of responding to the future for financial services, "I often put Australia at the very top of the list, along with the UK, Canada, and, probably, Singapore. There is a small group of countries that have been quite forward looking, and seen the opportunity and tried to stay arm-in-arm, or even a step ahead, of people in industry.

"There is a lot of promise that Australia can be one of the leading domiciles for many of the companies and markets that use blockchains and crypto-assets, precisely because it is a pretty accommodating, intelligent regulatory environment, up to now."

Regulatory scene 'very challenging'

As outgoing ASIC chairman Greg Medcraft considers an offer to join International Monetary Fund president Christine Lagarde's advisory committee on fintech and with Westpac director Craig Dunn chairing the international ISO committee determining blockchain standards, Professor Yermack said all regulators are operating in a "very challenging" environment as financial system infrastructure moves onto distributed databases.

While he recognises blockchains could ultimately be safer and more secure than current IT systems, "there is still a lot of uncertainty with the technology", including growing concern about "collision risk" as faster computers threaten to compromise the hash functions used to encrypt sensitive financial data.

Google in February hacked the SHA-1 encryption algorithm and said it will release the source code in six months, which Yermack says will be picked up by rogue governments.

It was an "ominous" sign for global e-commerce security when Google said in February it had broken the SHA-1 encryption algorithm using a new set of mathematical equations.

While SHA-1 has been considered a very weak protection mechanism in tech circles for a long time and has long been updated, Professor Yermack said the tech giant's revelation "changes the terms of the game" given its equations could be used as a template for attacks on more sophisticated encryption. Google is planning on publishing the source code in six months.


Many hackers and rogue governments, such as North Korea, "will raise their aspirations and commit resources to subversion in this area that they probably wouldn't have done prior to this," he said.

"I think this is quite dangerous … Google found an intelligent method that may be useful as a template for attacks on the tougher hash functions. Even more than that, they have trained people's eyes on the possibility here."

Goldman Sachs has replaced 600 traders in New York with two traders and 200 software engineers. Daniel Acker

Over the next two decades, global regulators will struggle to keep up with the pace of technological change – creating risk for entrepreneurs. Pointing to the recent knock-back by the US Securities and Exchange Commission of the Winklevoss brothers ETF based on the price of bitcoin, Professor Yermack said investors and entrepreneurs in projects relating to digital currencies "really don't know if the regulator is going to accommodate you, either now or in the future".

At the ASIC forum on Monday, several sessions will focus on new technologies, including the impact of artificial intelligence on regulation, and on cybersecurity.

The heightened regulatory focus on fintech follows Bank of England governor Mark Carney dedicating a G20 speech in German to the rising "systemic risk" that fintech could introduce to the financial system.

Macquarie Uni's risk day on Friday was attended by more than 100 people.

Goldman: we are a tech company


The rise of fintech is not only on the radar of regulators but also business schools, including NYU's Stern School of Business, which is now teaching 8 masters courses on fintech issues.

The Stern school at NYU has played a big role over decades providing workers to the big investment banks on Wall Street.

But Professor Yermack said in recent years, it has been forced to adapt as investment banks shun graduates trained in traditional finance subjects. "All they want to hire is data scientists," he said.

He called out Goldman Sachs, which had 600 staff trading equities in New York that have been replaced with two traders and 200 software engineers. Meanwhile, Commerzbank in Germany laid off 9600 bankers, replacing them with 2300 data scientists, according to the Wall Street Journal.

When it meets prospective employees at NYU, Goldman Sachs "doesn't even call themselves as a bank anymore they say they are a technology company", he said. "If you asked them who are their competitors, it wouldn't be Morgan Stanley or Citibank: it would be somebody like Amazon or Google."

Data61 chief executive Adrian Turner, who delivered a keynote address at the Australian Financial Review Business Summit this month, said traditional industry economics will be overturned by the arrival of "platforms" that will morph across industries, with tech giants such as Amazon moving into supermarkets, Apple into healthcare, and Google into transport. The pace of change means "we barely know what we should be teaching", Professor Yermack said. "It is a moving target because events are happening so fast in the real world."

He also questioned whether new technologies will actually create the productivity efficiencies their backers promise. Pointing to research by a colleague at NYU, for the past 130 years the cost of intermediation of financial services has hardly changed, remaining at a steady 2 per cent despite profound advancements in information technology.

"Whatever the productivity gains are, they have not been diverted to the customer. Maybe they have gone into the pockets of the shareholders or the bankers themselves. To a great extent, this is a story of unrealised promise."