SEC Commissioner Peirce Urges Regulators To Be Flexible  

Last Friday (April 1), in a speech at the University of Central Florida’s Inaugural FinTech Summit, Commissioner Hester M. Peirce discussed how regulators should facilitate innovation with a more flexible approach to regulation. Her main point was that regulators should approach technology with a sense of wonder, not fear, because the “fear of the unknown can stand in the way of regulators engaging with technology, but fear of the unknown also can prevent technologists from engaging with regulators.” 

The speech contained several references to the crypto industry and how the Securities and Exchange Commission (SEC), where she is a commissioner, could use some of the tools at their disposal to make experimentation a bit easier and to embrace innovation. 

Commissioner Peirce stressed that promoting innovation implies support for the conditions that make innovation possible. Under a rigid, suffocating regulatory framework, innovations may not endure long because they are unable to mature and thrive through the trial-and-error process. In this sense, “it’s not enough to declare that we support innovation; we also need to support the conditions under which innovation is possible.”  

Commissioner Peirce’s remarks stressed the uncertainty that comes with every innovation and how regulators’ risk aversion prevents them from adopting actual “trial and error” regulatory strategies. She noted regulatory agencies attract highly intelligent and talented but risk-averse professionals, many of whom are lawyers — a profession not noted for its entrepreneurial spirit. Furthermore, because old ways of doing things are virtually always disrupted by innovations, bureaucratic life leads to an environment that is often hostile to innovation. From the standpoint of a regulator, innovations can bring unwelcome guests with unwelcome gifts in the shape of complicated problems that don’t fit cleanly into a system that functions just fine. 

Regulators’ resistance to embrace innovation is one of the reasons that the former chief innovation officer at the Federal Deposit Insurance Corporation (FDIC) resigned a few weeks ago. In February, Mr. Meghji wrote a letter highlighting that existing regulation may not be adequate to deal the technological challenges of the 21st century, but a bigger problem was an excess of bureaucracy and probably even unwillingness by many public officials to adopt changes. 

Read More: Former FDIC CIO Pens Stinging Critique of Agency’s Innovation Focus 

Regulatory rigidity is having dire consequences, according to Peirce. As a result of the SEC’s rigidity, many entrepreneurs have chosen to dodge it totally — some by leaving the United States to work in places like Singapore, and others by crossing their fingers and continuing as if the SEC does not exist. The commissioner suggests the SEC should use tools such as exemptive orders and no-action letters to make experimentation a bit easier in this highly regulated industry.  

Commissioner Peirce has been advocating for a more cooperative and creative regulatory approach. In a recent PYMNTS interview, she had already underscored that while cryptocurrency companies argue that they require additional advice from the SEC in order to determine if their products are securities that must be regulated as such, “neither side has gotten much out of the conversation so far.”

Read the interview: Workable Exemptions Would Foster SEC, Crypto Collaboration, Says Commissioner Hester Peirce

This is in part because the private sector has been reluctant to accept an open invitation to work out a solution that balances innovation while protecting the markets. In the commissioner’s view, companies don’t approach the regulator because they’re not seeing the kind of productive engagement from the authority that they would like to see. There is a concern that companies may get an answer they don’t like, but “as regulators, (we) need to say, ‘OK, you can’t do it that way because of this concern that we have, but we’re willing to work with you to meet our objectives as regulators, but also meet your need, your interest in moving forward with your product.’”