ThinkTWENTY20

In a speech delivered April 1, 2022 at the University of Central Florida’s Inaugural FinTech Summit, SEC Commissioner Hester M. Peirce said that regulation influences whether, how and when technology finds its way into the financial markets. She talked about three ways regulators should engage with innovation. “First, regulators need to approach technology with a mix of skepticism and wonder. Second, regulators need to embrace the idea that new technology can make it easier to achieve worthy regulatory objectives. Third, regulators need to leave space for experimentation, tinkering, and even failure.”

Reflecting on history can help restore our appreciation for, and wonder at, the creative power of human innovation, Peirce said. “We need to keep before us this evidence of the capability of men and women working together to find creative, novel solutions to real-world problems, including problems that we do not even know we have because they are so embedded in our day-to-day lives. Of course, the wonder also needs to be leavened with an appropriate dose of skepticism, since, human nature being what it is, human ingenuity can come up with innovative ways to help or hurt people. But that skepticism needs in turn to be leavened with a good dose of humility; changes that make us uncomfortable because they seem chaotic and destabilizing and unpredictable are the kind of change that has the power to transform our world for the better.”

Peirce stressed that regulators also need to 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.

She cited, as an example, Professor Chris Brummer who 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. “The objective is to allow disclosure systems [to] grow with technology instead of being superseded by it.” Yes, added Peirce, “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.”

“If innovation is to thrive in a regulated space,” says Peirce, “regulation needs to leave room for experimentation, tinkering and, yes, failure. History shows that innovation is an iterative process, one that involves constant ‘incremental tinkering’ and slight modifications, ‘trial and error’ and sometimes spectacular failures. Innovation does not happen on an orderly schedule, and it cannot be planned, and certainly not by rule writers and rule enforcers. If the innovator encounters a regulatory hurdle each time she tinkers with her innovation, she is almost certainly going to tinker a lot less than she would have without that regulatory oversight. The result is almost certain to be less innovation overall and perhaps eventual technological stagnation at an immature state of innovation.”

Peirce goes on to state that “we might also remind ourselves that maintaining this openness to tinkering and to failure is simply to give due respect to fundamental American values: The can-do attitude that built much of this country without seeking approval from some government official, and the love of liberty that nurtured this attitude.”

For much, much more, please read SEC.gov | Is that a Fish Behind the Wheel? Remarks before the University of Central Florida’s Inaugural FinTech Summit.