Making Regulations Seems Really Hard--The SEC and Crypto

In my post yesterday, What Happens if Cryptocurrencies are Securities?, I wrote about what the SEC has said and done to date and then asked dozens of questions about what might happen to the cryptocurrency space--to the SEC, investors and the general market.

I wrote about how the SEC has been doing its diligence by gathering information from industry participants. This is much better than dictating based on limited understanding and information. I want to elaborate on this a bit. 

First, I have never been a lawmaker or a regulator, but my goodness it seems hard! They and their teams need to gather information, create proposals and approve regulations while working on many different things concurrently. It is easy to forget that cryptocurrency is not the SEC's sole focus. For those of us who spend a good deal of our time working on or thinking about the space, it feels like everyone should be focusing on it, but in the case of the SEC, the capital markets space is much, much broader than the fledgling crypto markets. The SEC's mission, as stated on it website is to:

• Protect investors
• Maintain fair, orderly, and efficient markets
• Facilitate capital formation

How on earth do you develop and maintain expertise in all of the capital markets, formal and informal, they regulate? And, that is why it is admirable that SEC Chairman Jay Clayton and his crew are taking the time to learn about the crypto space. They probably won't become experts like the industry's leaders, but the fact that they are making a much greater effort than just saying, "this kind of looks like the equity markets, so we're going to regulate it the same way," is encouraging. 

In general legislators and regulatory bodies are having difficulty keeping up with technology, with data ownership and protection having recently been in the spotlight. During Facebook CEO Mark Zuckerberg's hearing in front of the Senate, Senator Orrin Hatch asked Zuckerberg, ". . . how do you sustain a business model in which users don't pay for your service," to which Zuckerberg replied, "Senator, we run ads." This is the same business model that television deployed when Hatch was first elected to the Senate in 1977.

Second, lawmakers and regulators tend to create rules based on today but are not overly proactive in ensuring that they serve their purpose in the future as the world changes. In the case of Sen. Hatch's question to Zuckerberg, the business model is the same as ones used in the 1970s, but the underlying dynamics--granular data and how it is used--have changed to the point that it is almost unrecognizable. Who could have seen that coming? In general, it's not the legislators; it's business people who are now billionaires!

Frankly, it's possible that even in 2013, Zuckerberg and his team did not foresee the mess that having a loose data ecosystem could cause. In technology, change happens fast; in the crypto space things are happening at an almost unbelievable pace. In an ideal world, the SEC allows an industry body to self-regulate the space. That body would better be able to keep up with the changes in the space to regulate appropriately. If the SEC is not willing to cede control, then it would be ideal for them to regulate with more of a playbook than with a stone tablet. Industry has a way of adapting to regulation and skirting it if possible, hopefully the SEC creates a framework that protects investors while encouraging more of the innovation we are seeing.