In recent weeks, Commissioner Hester Peirce of the Securities and Exchange Commission (“SEC”) gave two speeches highlighting the need for legal clarity in the FinTech space and for legacy financial firms to embrace innovation.
Speaking at a George Washington University Law School event – Regulating the Digital Economy Conference – Commissioner Peirce discussed the recent market turbulence of many Reddit-fueled stocks, the aftermath of such volatility, and how the digital economy enabled many of these events to take place. Still, she argues, the SEC’s role of “protecting investors, facilitating capital formation, and fostering market integrity” has not changed, even if the medium of achieving such goals has changed. Regulators need to focus more on embracing and adapting to new technology to ensure investors properly receive and understand the information they need to make informed investment decisions and to deter market manipulation.
Commissioner Peirce further notes the role of the SEC is to “protect investors and markets, not incumbents”. These legacy financial firms should not be able to use the SEC to block new firms and new technologies from entering the market. Instead, regulators must consider the investors’ and markets’ best interest. Commissioner Peirce views the technological changes as an opportunity for retail investors to participate in an often convoluted space.
One area in particular is the rapidly emerging decentralized finance (“DeFi”) industry which is looking to uproot the legacy centralized financial system (“CeFi”). DeFi is built on the principles of transparency, open access and predictability, but, as Commissioner Peirce warns, also includes risks of security vulnerabilities and potential scaling problems, among others. Given this, Commissioner Peirce urges regulators to provide “both legal clarity and the freedom to experiment so that DeFi can compete with CeFi”.
Commissioner Peirce further highlights the need to be more open to technological innovation that may make the markets more efficient and effective, for example, with respect to trade settlement. Until a regulatory change brought the settlement time to T+2, settlement did not occur until three days after the trade date – or T+3. Many industry participants in recent days have called for even shorter settlement periods, T+1 or even real-time settlement. Consistent with this approach, the Depository Trust and Clearing Corporation released a white paper analyzing the benefits and costs to moving to T+1, which could be accomplished utilizing distributed ledger technology and other emerging technologies.
In later remarks for the FinTech Panel at the Institute of International Bankers 2021 Annual Washington Conference, Commissioner Peirce further reiterated the need to embrace new technology and fears the legacy financial system is currently treating FinTech as a threat instead of an opportunity. She went on to discuss how resisting innovation could lead to further problems in the industry including using regulation to prevent competition and hinder the growth of the digital asset industry, scaring investors away from dealing with new but otherwise regulated financial institutions, and discouraging existing financial institutions from fully embracing innovation and new technology.
Finally, Commissioner Peirce again focused on the need for greater legal clarity around FinTech. For example, she argues, the SEC needs to provide greater clarity both for digital asset securities and for digital assets that are not securities and how registered entities interact with these assets. A clearer approach to considering applications for crypto exchange traded products is also greatly needed. She is hopeful, however, SEC Chairman nominee Gary Gensler will provide this much needed certainty in the FinTech space.