Fintech Risk Events
Fintech Risk Events is an open catalog of observed (publicized) operational failures of fintech business models. The catalog aims to document (in due course) such events reasonably accurately to allow risk managers understand the (potentially new) vulnerabilities of new financial services models.
Criteria for inclusion
Fintech companies, i.e. newly established financial services providers that operate primarily or exclusively via new (digital) platforms and may be unregulated, as distinct from established financial services firms that operate with a mix of older technology platforms and are (mostly) regulated. Indicatively, the crisis period of 2008-2009 is the cutoff date for newly established entities.
As established firms adopt "fintech" models the list will aim to include any operational risk events associated with these platforms (to the extend that this can be clearly identified in published information). Out of scope are risk events captured under other risk categories such as unexpected credit losses (credit risk) or market losses (market risk), although sometimes it is difficult to cleanly classify an event.
General purpose digital marketplaces (e-commerce) are not in scope.
Risk Event Eligibility
There should be adequate, independent, confirmed and public information about the event, with authoritative, permanent urls.
At present there is no explicit materiality threshold except for bitcoin incidents where a 1mln (rough) equivalent threshold is used.
Risk Event Classification
Basel Operational Risk Categories
Given the close relation of Fintech to the financial industry it is instructive to attempt to classify events according to the globally recognized bank regulatory framework (Basel II) as listed below:
- Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of positions, bribery
- External Fraud - theft of information, hacking damage, third-party theft and forgery
- Employment Practices and Workplace Safety - discrimination, workers compensation, employee health and safety
- Legal Risk - Clients, Products, and Business Practice - market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning
- Physical Damage - Damage to Physical Assets - natural disasters, terrorism, vandalism
- Business Disruption and Systems Failures - utility disruptions, software failures, hardware failures
- Business Execution, Delivery, and Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets
This classification may be tenuous for some instances, given the novelty of business models.
Business Failure Events
The Basel classification scheme does not include total business failure (that is, events of administration, bankruptcy etc) as an operational risk event. This is because the operational risk framework is primarily meant to help manage / mitigate operational risks, whereas bankruptcy is clearly the final outcome when all management efforts have failed. We currently do include fintech business failures as a category, as they are informative for risk management purposes. A threshold of total funding raised will be applied (to differentiate bankruptcies from the much more common business model failures of early stage startups). On the other hand, failure of a new business model to flourish (resulting e.g. in an orderly sale to third party), while possibly informative about risk factors associated with the adopted business model, can not be cleanly separated from more traditional risk management categories and will no be included.
List of Events
|1. Entity||2. Publication Date||3. Country||4. Category||5. Event Description||6. Event Type||7. Loss Amount||8. Links|
|MtGox||Jun 2011||Japan||Cryptocurrency||Security Breach||EF||2,609 BTC||Wikipedia|
|Clinkle||Jan 2014||US||Payments||API Security Breach||EF||N/A||Techcrunch|
|Wonga||April - Oct 2014||UK||Payday Loans||Bad Debt Collection Practices, Debt writeoffs||CPBP||~240mln Pounds||Wikipedia|
|MtGox||Dec 2014||Japan||Cryptocurrency||Theft||IF||744,408 BTC||Wikipedia|
|TrustBuddy||Aug 2015||Sweden||P2P Lending||Misuse of client funds, Bankruptcy||IF||N/A||FT, Telegraph|
|Prosper||Dec 2015||US||P2P Lending||Enabling financing to suspected terrorist||CPBP||N/A||LAT|
|Powa Technologies||Feb 2016||UK||POS, Payments||Bankruptcy||Business Failure||N/A||Wikipedia|
|Ezubao||Feb 2016||China||P2P||Fake investment products to one million retail investors||CPBP||$7.6bln||NYT|
|Dwolla||Mar 2016||US||Online Payments||Poor Consumer Data Protection Practices||CPBP||$100k||WSJ|
|LendingClub||May 2016||US||P2P Lending||Altering Loan Information||IF,CPBP||N/A||Wikipedia|
|Slock.io||Jun 2016||Germany||Cryptocurrency||Software Hack||EF, BE||3,641,694 ether||NYT|
|Bitfinex||August 2016||Hong Kong||Cryptocurrency||Security Breach||EF||120,000 BTC||Reuters|
|LendUp||September 2016||US||Payday Loans||Misleading borrowers about pricing, failing to report credit information||CBPB||$6.4 million in fines||WSJ|
|Wonga||April 2016||UK||Payday Loans||Client Data Breach||EF||N/A||BBC|
|Prosper||May 2017||US||P2P Lending||Overstating Returns||BE||N/A||Bloomberg|
|Yapizon||May 2017||South Korea||Cryptocurrency||Security Breach||EF||$5.3 mln in BTC||Bitcoin.com|
|Swarm City,Edgeless Casino, Aeternity||July 2017||US||Cryptocurrency||Security Breach||EF||$32.6 million / 153,000 ether||CNBC|
|Bithumb||July 2017||South Korea||Cryptocurrency||Security Breach||EF||$1 mln in BTC / ether||Fortune|
|CoinDash||August 2017||US||Cryptocurrency||Security Breach||EF||$7 mln (in ether)||CNBC|
|Enigma||August 2017||US||Cryptocurrency||Security Breach||EF||$500,000 (1,492 ether)||Wired|
|Huobi, OKCoin||August 2017||China||Cryptocurrency||Misuse of client funds||IF||$150 mln||Quartz|
|Tezos||Sep 2017||US / Switzerland||Cryptocurrency||Misuse of client funds||IF||$232 mln||Reuters|
|NextBlock Global||Oct 2017||Canada||Cryptocurrency||False representations||CPBP||NA||Forbes|
|Parity Technologies||Nov 2017||UK||Cryptocurrency||Software bug / User error||BD||$300 mln||Guardian|
|Tether||Nov 2017||Hong Kong / US||Cryptocurrency||Security Breach||EF||$31 mln||Bloomberg|
|NiceHash||Dec 2017||Slovenia||Cryptocurrency||Security Breach||EF||4,700 BTC ($70 million)||WSJ|
|Youbit||Dec 2017||South Corea||Cryptocurrency||Security Breach leading to bankruptcy||EF||17% of assets||BBC|
There are various reports (and reporting sites) about crowdfunding scams. While the proliferation of such events can potentially tarnish the reputation of crowdfunding platforms, to date there appears to be no event that would qualify
A larger list of bitcoin incidents was maintained in the List of Bitcoin Heists (apparently no longer updated)