By Anne Sherry, J.D.
SEC Chair Gary Gensler discussed the challenges the SEC faces in adapting its tripartite mission to emerging technologies such as stablecoins, DeFi, and direct trading platforms. Speaking to Georgetown Law Professor Chris Brummer at DC Fintech Week, Gensler stressed the need for the SEC to protect investors and promote fairness as the financial markets evolve. Gamified investing apps, predictive data analytics, and the concentration of assets into a handful of stablecoins all present issues for regulators.
In some respects, Gensler’s comments suggested that the task of keeping up with new technology is not a new challenge for the SEC. Gensler cited the SEC’s establishment, under the chairmanship of Arthur Levitt, of alternative trading systems in response to the proliferation of trading on online bulletin boards as the Internet became more widely adopted. In Gensler’s view, predictive data analytics could transform finance as significantly as the Internet did in the 1990’s. The central question, Gensler said, is how the SEC can continue to achieve its core public policy goals when new technologies come along and change the face of finance.
Specifically in the areas of artificial intelligence and predictive data analytics, Gensler expressed concerns about the further entrenchment of societal inequities that may be embedded in the underlying data. For example, aggregating consumer data from Fitbits and other devices and using that information to determine who is a good credit risk may embed society’s existing biases. Gensler believes there is not enough public debate around this issue. Under the Fair Credit Reporting Act, people have a right to know why they are denied credit, and he suggested regulators should consider policies to guard against bias and allow for explanations of these decisions.
The chair also sees a risk of conflicts of interest in some of these innovations. Are digital analytics platforms solely optimizing for the benefit of investors, or are they also optimizing for their own revenues? He noted that thirteen years after the bitcoin white paper, no one knows who Satoshi Nakamoto is. There is still an “off-the-grid, cryptographers’ approach” embedded in some of this innovation, he said.
Brummer observed that the rise of retail investing has brought new entrants to the capital markets, particular people of color and younger investors, and asked Gensler how he balances the risks and opportunities of these platforms. Gensler responded that, while investors are empowered to choose their risks, some of the digital engagement practices may steer users towards certain options via behavioral prompts or gamification. These apps are still subject to concepts of best interest, best execution, and the fiduciary duties of care and loyalty, he added. Two of the SEC’s three core objectives are investor protection and ensuring fair markets, and either way, financial inclusion is part of the agency’s remit.
Another issue for regulators as a whole is financial stability and systemic risk. While seeming to evade Brummer’s question about what role the SEC will have in regulating stablecoins, particularly after the CFTC’s large fine against Tether, Gensler highlighted some issues about the tokens more broadly. Stablecoins are a $130 billion asset category that is primarily concentrated on three platforms, raising questions of systemic risk. Gensler said that stablecoins serve not just to facilitate crypto trading but also to avoid fiat banking systems and the regulations that those entail, including anti-money-laundering and tax laws. All financial regulators are assessing stablecoins from the perspective of whether they are going to be like banks, what form their reserves take, and whether they fall within the AML rules, the chair said.