Speed, Complexity and Systemic Risk – Lessons from the Last Crisis

When Innovation Amplifies Risk

Risk doesn’t disappear – it migrates. After 2008, regulators successfully fortified banks, but risk shifted to less-regulated entities: asset managers, ETFs, and now stablecoin issuers. These new liquidity providers share a critical vulnerability I witnessed in my organisation during the onset of the financial crisis: liquidity mismatch. They promise instant redemption while investing in assets that become illiquid precisely when redemptions spike.

Managing structured assets during the financial crisis taught me that complexity and speed create a dangerous combination. Tokenization accelerates both. Atomic settlement eliminates certain risks but amplifies others. When markets move at digital speed, traditional circuit breakers fail. Flash crashes become more severe. Shock transmission accelerates beyond policymakers‘ ability to respond. Atomic settlement may reduce operational risk, if such settlement is consistently, seamlessly and entirely part of an AI powered but checked process flow. In any event, risk management frameworks designed for human-speed markets struggle with algorithmic velocity.

The Fragility of Composability

Decentralised Finance’s – DeFi’s – composability – the ability to combine protocols like Lego blocks – mirrors the structured products that amplified the 2008 crisis. I remember to have built synthetic CDOs that seemed robust individually but proved catastrophically interconnected. Today’s composed DeFi products exhibit similar characteristics: innovation that appears to reduce risk while actually concentrating it.

For instance, a €600 million healthcare receivables monetization I structured in Italy required understanding of every link in the chain. One weak connection could cascade through the entire structure. DeFi faces identical challenges but without the documentation standards and legal frameworks that traditional finance developed through painful experience. Smart contracts may execute flawlessly, but they can’t adjudicate disputes or adapt to unforeseen circumstances.

Building Non-Fragile Systems

Even when implementing transformational change – reducing costs while improving risk management – the effort taught me that resilience requires redundancy. Fast, efficient systems are often fragile. Tokenization’s efficiency gains must be balanced against systemic stability. This means accepting some friction to prevent cascading failures.

Effective oversight demands understanding both the technology and its failure modes. Prescriptive rules, from EMIR to MiFID II, can’t anticipate every innovation. Instead, we need principles-based regulation that adapts to technological change while maintaining core protections. The alternative – waiting for the next crisis to reveal systemic vulnerabilities – is a luxury we can’t afford.