Old Statutes, New Tech, the Same Critical Challenges
The future of Fintech is a continuing saga. As technology continues to rapidly evolve it impacts not just finance but much of the surrounding environment. For regulators like the Commission the rapid evolution of tech presents the continuing challenge of how to administer and implement statutes that were created in a different age — the 1930’s when radio and phones tied to a wire were tech — to crypto, DeFi, and artificial intelligence, Fintech today.
Chair Gary Gensler addressed this question in remarks delivered at the recent DC Fintech Week on October 21, 2021. Prepared Remarks at DC Fintech Week (here). Mr. Gensler began by creating a bit of context: “Finance and technology have coexisted in a symbiotic relationship since antiquity. Think about it. Money, accounting and ledgers, which we take for granted in some ways now, were technologies that changed the face of finance long ago.” Thus, the Financial Stability Board recently focused on Fintech as “technologies that may have a material effect on how finance is delivered.”
If Fintech is the delivery vehicle of finance, then the central question is how regulators such as the SEC continue to achieve their core public policy goals as it evolves today. Mr. Gensler addressed this question by considering two innovations. First, he addressed artificial intelligence. Presently, the Chair stated that in his view artificial intelligence is challenging decision-making more than crypto: “Predictive data analytics, including machine learning are increasingly being adopted in finance from trading, to asset management, to risk management. Though we’re still in the early stages of these developments, I think the transformation we’re living through now could be every bit as big as the internet was in the 1990,” according to Mr. Gensler.
The new technologies can and are transforming. Yet they also present traditional issues such as conflicts of interest, bias and systemic risks. New tech also holds the potential to reinforce societal inequities. Dealing with these and other, similar issues, presents significant challenges for the future.
Another innovation is crypto and, within that space, decentralized finance or DeFi. This development is challenging “current business models in trading, lending and lending,” according to the Chair. Again new issues are being raised based on many traditional notions.
While Chair Gensler describes himself as “technology-neutral” he is not public policy neutral. As these new technologies continue to develop and evolve a key question is how to protect investors. Another centers on maintaining fair, orderly and efficient markets and facilities for capital formation. At the same time it is essential to guard against improper activity and promote financial stability. Questions about how to achieve these goals are “timeless” despite the fact that the technology is new, Mr. Gensler stated in concluding his remarks.
The statutes administered by the agency may be decades old, but as Chair Gensler stated, the questions are not. The challenge of protecting investors, maintain orderly markets and fostering capital formation is as difficult today as it was at the time the statutes were initially drafted in the 1930s. While the tech is new, and the terms are different, the central questions being addressed are essentially similar. Indeed, the challenge of bringing a new ethics to the market-place is as important and difficult today as it was in 1930.