The SEC should not sacrifice citizens on the altar of private sector innovation

Republicans on the House Financial Services Committee are pushing hard on legislation that would regulate the structure of digital asset markets. Like most other proposals for crypto legislation that we have seen from Congress thus far, this discussion draft is a terrible blueprint for regulation that would tailor, exempt and repeal existing laws in order to accommodate crypto industry business models, notwithstanding the harm they have caused. 

This new proposal would also do something more fundamental, though, that we haven’t seen before. It would require the Securities and Exchange Commission (SEC) to consider how everything it does could impact innovation. If enacted, this would eviscerate securities regulation as we know it. 

The SEC was formed in 1934, after a post-World War I speculative frenzy culminated in the stock market crash of 1929, and thousands of people lost their life savings. The financial markets of that era were rife with worthless assets supplied by unscrupulous dealers who did not provide any meaningful disclosure. The SEC was created to implement a new investor protection regime focused on registration and disclosure requirements and anti-fraud provisions.  

These investor protections would be jeopardized by the House Republicans’ new proposal. Already, superficially neutral requirements for the SEC to analyze the costs and benefits of its rules are weaponized in the courts to undermine the SEC’s rulemaking process, even though those requirements are a very poor fit for financial regulation. If the SEC were given a new innovation mandate, it would be a new and potent tool for attacking SEC rules. Litigants will argue that these rules should be struck down for impeding their innovations. But the SEC wasn’t created to help private sector innovators. The SEC was created to protect the public from harm.   

Innovation is often but not always a positive force. As a society, we have become overly credulous of technological innovation in particular, and we tend to overlook its limitations and harms. But let’s be honest — most technological innovation is not done for the purpose of making the world a better place. It is done for the purpose of making money for innovators and their investors. That is not always a win-win proposition for society as a whole.  

Sometimes, making money means ignoring or breaching regulations designed to protect people from harm. Sometimes it means actively lobbying to get those regulations changed, arguing that your innovation is so “paradigm-shifting” that the old rules shouldn’t apply.

For example, the prominent venture capital firm Andreessen Horowitz realized several years ago that “Delivering significant returns on all [their crypto] investment…would necessitate playing a major role in shaping rules for these companies,” the New York Times recently reported. Intense lobbying followed, leading to legislative proposals like the one we now see before us. 

Ultimately, technology is only a tool, and the lessons we have learned over decades (sometimes centuries) about how people can harm one another remain relevant even as the tools available for inflicting harm become more sophisticated. And so many of the rules addressing those harms also remain relevant.  

Back in 1946, the Supreme Court recognized that the securities laws were flexible enough to adapt “to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” These laws shouldn’t be discarded just because they do not accommodate the business models of the latest wave of innovators — especially if those business models are predatory or rife with conflicts of interest.  

Last month, OceanGate’s Titan submersible imploded, killing OceanGate’s CEO Stockton Rush and four passengers. In June 2019, Smithsonian Magazine had published an article on OceanGate and Rush, saying Rush believed that regulation was well-meaning, “but he believes it needlessly prioritized passenger safety over commercial innovation.” 

“There hasn’t been an injury in the commercial sub industry in over 35 years,” Rush told the Smithsonian. “It’s obscenely safe, because they have all these regulations. But it also hasn’t innovated or grown — because they have all these regulations.”

This insight into the mindset of an innovator should give us pause. Of course, we need innovators in our society, but we also need pushback against those innovators when the public is at risk. And how can the SEC meaningfully push back against investor harm if Congress requires it to nurture private sector innovation?   

Rush’s hubris won’t soon be forgotten in the world of marine exploration, but it should also be a general wake-up call. We need a broader reckoning with the relationship between innovation, harm and regulation. As a start, Congress should refuse to pass any legislation that requires the SEC, a regulator created to protect investors from harm, to sacrifice those investors on the altar of innovation.

Hilary J. Allen is a professor of law at the American University Washington College of Law.