The sweet spot between protecting investors and fostering innovation
I’ve never met Jay Clayton, but Iwould love to chat over drinks with the chairman of the Securities and ExchangeCommission.
My first question would probably gosomething like this: with so much regulation in place, how on earth did the SECmiss 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 bedesigned to better understand the challenges facing the largest financialregulator in the United States. Only then would I be in a position tocontribute ideas and solutions.
Regulators have a hard job
As the metaphorical policemen ofthe financial markets, the SEC and related organizations around the world existto keep investment transactions fair and legal. They not only protect theinnocent investor from malicious actors, but track down and punish the badguys. Their work adds safety and security to the world’s financial markets.They’re the white blood cells of the investing ecosystem, a necessaryingredient to keeping things running normally. But their benefits often come atthe 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’stechnically possible for your car to go 120 miles per hour?
Just as a highway patrol cop willstop someone from dangerous, illegal dangerous driving, the SEC confronts thosewho flout regulations. Certain entrepreneurs might argue that they can onlyachieve their maximum potential when nothing limits them, and that’s exactlywhat regulations are: the limits that stifle their work.
So where is the sweet spot betweenprotecting investors and fostering innovation?
One word: collaboration
We need improved interface betweenthe 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 justneed to talk to each other. They already have a large sphere of shared interestin financial markets, so there’s plenty to discuss.
Even if they exist at opposite endsof the investing spectrum, these people are positioned to define thetech-enabled, regulation-friendly middle ground for the rest of us.
Call me, Jay.