The sweet spot between protecting investors and fostering innovation

I’ve never met Jay Clayton, but I would love to chat over drinks with the chairman of the Securities and Exchange Commission.

My first question would probably go something like this: with so much regulation in place, how on earth did the SEC miss Madoff’s ponzi scheme and Enron’s accounting scandal?

But don’t let my tone mislead you. I don’t want his job, but I do want to help. My follow-up questions would be designed to better understand the challenges facing the largest financial regulator in the United States. Only then would I be in a position to contribute ideas and solutions.

Regulators have a hard job

As the metaphorical policemen of the financial markets, the SEC and related organizations around the world exist to keep investment transactions fair and legal. They not only protect the innocent investor from malicious actors, but track down and punish the bad guys. Their work adds safety and security to the world’s financial markets. They’re the white blood cells of the investing ecosystem, a necessary ingredient to keeping things running normally. But their benefits often come at the expense of innovation.

Emergent technology unlocks new capabilities in most fields, and finance is no exception. “Blockchain” is probably the buzziest word in finance this decade, for example, but its capabilities need to be sufficiently managed and understood by regulators, or else those features become liabilities. Regulators are generally between a rock and a hard place. They have to manage a Pandora’s box of technology that could make their jobs way harder or way easier. Their decisions about how to manage that technology furthermore become law. Remember Uncle Ben’s words to Spiderman: “With great power comes great responsibility.”

The same sentiment applies here.

But innovators usually want to operate unrestricted

Why drive the speed limit when it’s technically possible for your car to go 120 miles per hour?

Just as a highway patrol cop will stop someone from dangerous, illegal dangerous driving, the SEC confronts those who flout regulations. Certain entrepreneurs might argue that they can only achieve their maximum potential when nothing limits them, and that’s exactly what regulations are: the limits that stifle their work.

So where is the sweet spot between protecting investors and fostering innovation?

One word: collaboration

We need improved interface between the regulators who make the rules and the innovators who want to play by them. Arguments and PR posturing are not realistic ways forward — these people just need to talk to each other. They already have a large sphere of shared interest in financial markets, so there’s plenty to discuss.

Even if they exist at opposite ends of the investing spectrum, these people are positioned to define the tech-enabled, regulation-friendly middle ground for the rest of us.

Call me, Jay.

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