Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
Hester Peirce Remarks at University of Central Florida’s FinTech Summit: Is that a Fish Behind the Wheel?
SEC | Hester Peirce | Apr 1, 2022
Thank you, Barry [Miller]. Thank you also to Professor Ajai Singh. It is a pleasure to be part of the University of Central Florida’s inaugural FinTech Summit. This morning, I would like to discuss the ways in which financial regulators ought to engage with innovation. Before I begin, I will give my standard disclaimer: the views I express are my own and not necessarily those of the Securities and Exchange Commission (“SEC”) or my fellow Commissioners.
1. Embrace both skepticism and wonder.
People are skeptical of new things, including innovations that end up transforming their lives. Regulators share this fundamental human trait. Just as other people, regulators like dealing with known quantities: a rulebook they have mastered; familiar regulated entities that know and love the rulebook almost as well as the regulators do; and time-tested technologies and business processes that fit neatly into that rulebook. But this affection for the familiar is typically even more pronounced among regulators. For one thing, regulatory agencies draw very smart and talented, but risk-averse, employees, many of whom are lawyers, a profession not known to be entrepreneurial; I can say so in this crowd of engineers and business people.[7]
See: Hester Peirce: Dissenting Statement on Proposal to Amend Regulation ATS (and limited comment period)
For another, regulators generally operate under incentives that make them look skeptically at the unknown and the new: They are rarely rewarded for innovation, and any performance metrics generally measure their productivity in numbers of rules, exams, or enforcement actions. Doing things the way they have always been done—which is probably also the way that saw the regulator’s predecessors off to a happy, fulfilling retirement—seldom carries significant risk. Departure from tried-and-true methods, on the other hand, creates all sorts of risks.
2. Welcome the role technology can play in meeting important regulatory objectives.
If regulators approach technology with a sense of wonder, not fear, they might also spot ways in which it makes it easier to accomplish regulatory objectives such as investor protection and market integrity. Let us look at a couple examples.
While we do not have time to talk in depth about crypto today, it too offers opportunities to better achieve certain regulatory objectives. Decentralized finance (“DeFi”) can serve investor protection goals and market resilience goals by cutting out middlemen from financial transactions and breaking down concentration within the financial services industry. Moreover, in a recent article, Professor Chris Brummer imagines using “crypto-native solutions,” such as smart contracts, non-fungible tokens, decentralized autonomous organizations, and Decentralized Identifiers to build a retail-oriented disclosure system that would be superior to existing traditional disclosure systems in that it would provide disclosures in a form and manner that people would actually use.[26] The objective, as he puts it, is to allow “disclosure systems [to] grow with technology instead of being superseded by it.”[27] Yes, crypto raises some real challenges and risks for society, but it also may help society to achieve some of the things the SEC cares about—protecting investors, facilitating capital formation, and fostering market integrity.
3. Allow, and indeed encourage, trial-and-error, rather than insist on check-the-box compliance.
If innovation is to thrive in a regulated space, regulation needs to leave room for experimentation, tinkering, and, yes, failure.
Speech: Lawless in Austin
Video: Alixe Cormick interviews Commissioner Hester Peirce at FFCON21
SEC Chair Gary Gensler has said, “I am technology-neutral. I think that [crypto] technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”[31] Describing this approach as technology-neutral, of course, works only if new technology can in fact comply with a prescriptive rule set designed for old technology, which is not at all clear.[32 Even if it can work, though, technologies forced into an inflexible, stultifying regulatory framework may not last long either because they cannot go through the trial-and-error process that allows them to mature and thrive. In other words, it is not enough to say that we welcome innovation; we also have to welcome the conditions under which innovation is possible.
Continue to the full article --> here
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