5 Key Strategies for the SEC to Foster Innovation

For nearly a century, the U.S. Securities and Exchange Commission has been the most influential financial regulator globally, playing a crucial role in ensuring the depth, fairness, and accessibility of our capital markets. However, its continued relevance hinges on its ability to not only respond to innovation but also to proactively nurture it. Throughout its history, the SEC has demonstrated an ability to adapt to evolving market conditions, technological advancements, and increased retail participation. At its best, the agency has leveraged innovation to enhance transparency, protect investors, and facilitate capital formation. Yet, in recent years, it has veered off this path, most notably in its approach to cryptocurrency and blockchain technology. The upcoming Consensus 2025 in Toronto, where Tuongvy Le will be speaking, highlights the importance of regulatory clarity in the crypto space. Fortunately, with a change in leadership and a more open-minded approach emerging, the SEC has an opportunity to correct its course. The question remains, however, how to make this change lasting and integrate innovation into the SEC's core identity, ensuring that the next promising financial technology is not stifled in its infancy. Having spent nearly six years at the SEC, first as Senior Counsel in the Division of Enforcement and then as Chief Counsel in the Office of Legislative and Intergovernmental Affairs, and later holding senior legal and policy roles in crypto firms, it's clear that the SEC can more effectively fulfill its mission and maintain global leadership only by becoming an active partner in financial innovation. The SEC's History of Embracing Change The SEC boasts a proud history of embracing change for the benefit of both investors and markets. The digitization of corporate filings through EDGAR in the 1990s, replacing paper documents with searchable databases, is a notable example. The approval of Regulation ATS, which enabled the rise of alternative trading systems and increased competition and liquidity, is another. The evolution of ETFs from novel products to mainstream offerings that provide low-cost, diversified exposure to a wide range of assets is a testament to the SEC's ability to adapt. More recently, the introduction of fractional-share trading has empowered millions of retail investors to own parts of companies they could previously only admire from afar. A particularly relevant example for the SEC's approach to crypto is its treatment of asset-backed securities. Recognizing these complex financial products did not fit neatly into existing disclosure regimes, the SEC developed a tailored disclosure framework over the years, balancing innovation with investor protection without resorting to numerous enforcement actions. Instances of Regulatory Lag There have also been instances where the SEC failed to adapt, to the detriment of both investors and markets. The agency was slow to respond to the rise of high-frequency trading, contributing to the 2010 Flash Crash. It took years to implement crowdfunding rules authorized by the JOBS Act and lagged behind in digital reporting standards, delaying broader access to market data. Moreover, its stance on crypto has often been cautious, veering into hostility. Instead of issuing clear guidelines for digital assets, the SEC pursued a patchwork enforcement campaign, often targeting firms that were attempting to comply in good faith. Many of these actions did not involve fraud or investor loss, leading to American crypto companies relocating overseas and a global industry flourishing without U.S. participation. The SEC's reluctant approval of spot bitcoin ETFs in 2024, following a federal court ruling, and its failure to create a crypto disclosure framework akin to what it did for ABS, underscore the need for a more proactive and innovative approach. Innovation as an Opportunity Crypto may represent a new frontier, but the SEC has navigated similar challenges before. It is well-equipped to modernize its rules to meet new realities and leverage innovation, not just regulate it. Blockchain technology, for instance, could facilitate near-instant trade settlement, reduce risk, and free up capital. It could enhance market transparency through immutable records and real-time transaction data, lower operational costs by reducing intermediaries, and expand access to private markets and hard-to-reach asset classes through tokenization, benefiting both issuers and investors. Interestingly, the SEC has not fully explored how blockchain could improve its own market oversight, a missed opportunity that it's not too late to address. A Path Forward Building innovation into the SEC's core mission is not about adopting radical ideas but about drawing from proven tools within the SEC's own playbook. In the global race to define the future of finance, the SEC faces a choice: to lead or fall behind. Its greatest strength has always been its credibility and adaptability. The next generation of investors and entrepreneurs will not wait for 20th-century regulations to catch up with 21st-century innovation. The SEC must adapt, not just to the present but to what the future holds, to remain the gold standard in financial regulation.