Donald Trump, the Securities & Exchange Commission, and FinTech

On Monday, the Securities and Exchange Commission held its first-ever FinTech forum, an all-day, four-panel affair with representation from startups (Betterment, Digital Asset Holdings, etc.), incumbents (BlackRock, NASDAQ, etc.), and other major stakeholders (PwC, EY, etc.). The forum was well thought-out (event twitter hashtag!) and as you would expect, the level of discussion was high. However, in looking over my notes, my first takeaway is what was not said.

In my opinion, the biggest question in FinTech at the moment (as it is for a lot of other things) is what the effects of a Trump administration will be. This had particular relevance for the SEC on Monday, as only hours after Chairwoman Mary Jo White addressed the audience at the start of the forum, she announced elsewhere she would be retiring in January before the new administration. The SEC representatives moderating the panels were similarly quiet on the matter. While I suspect they would have been limited in their ability to comment, I imagine the panelists had some thoughts on how a Trump presidency could help or hurt FinTech in the U.S., and I wish they had been asked.

Two things that caught my attention:

  1. The panel on blockchain — pardon me, distributed ledger technology — delved into the aspects of FinTech that most resemble science fiction, particularly smart contracts. Panelist Emin Gun Sirer, a professor at Cornell University, noted that the most common (only?) financial contract ordinary people use is a check— a fairly static, binary instrument (you write it or not, it’s deposited or not). But what if you could use “smart” checks that would only deposit if certain criteria were met? What if a series of smart contracts embedded in a blockchain could replace an entire corporation (editor’s note: maybe more realistically, something like a REIT?), carrying out instructions and delivering payment without human oversight. The robots aren’t just coming for our jobs, they’re coming for our companies, it seems.
  2. I described the panels as a mix of incumbents and startups, but more and more the lines between the two are blurring together, aren’t they? For example, the hoodie-clad startup founder/CEO on the first panel was technically an employee of BlackRock after the firm acquired the startup, Future Advisor, in 2015. I also immediately thought of OnDeck’s collaboration with JP Morgan. Panelist Jim Allen, head of the Capital Markets Policy Group at the CFA Institute, compared the situation to the rise of Electronic Communications Networks and their subsequent acquisition by stock exchanges in the early 2000s, and I thought that was interesting.
“Frenemies” is how panelist Grainne McNamara, principal in the Capital Markets team at PwC, described the relationship between incumbents and FinTech.

Two more things that caught my attention:

  1. SEC Commissioner Michael Piwowar’s opening remarks (he spoke after Chairwoman White and Commissioner Kara Stein) delved into why the SEC should be the lead regulatory body with regard to FinTech, listing among other reasons the fact that the SEC is the only regulatory agency with a mission that explicitly includes facilitating capital formation, and also suggesting that the SEC’s 11 regional offices could serve as “intake centers” for startups across the country. It was a persuasive case, but the fact that Commissioner Piwowar felt the need to make it suggests to me the alphabet soup of regulators with jurisdiction over FinTech can be just as confusing for the regulators as it is for the companies.
  2. Panelist Karen Mills, former head of the Small Business Administration and current senior fellow at Harvard, said the U.S. government still has basically no data on loan originations, even though a requirement to collect that information was included in Dodd-Frank five years ago. This seems important to me, as it does to Ms. Mills.

Facts and quotes I heard for the first time:

  • 70% of the venture capital in the U.S. goes to three states (said Ms. Mills): New York, California, and Massachusetts.
  • Of the $17 trillion in loans outstanding in the U.S., about half has been securitized, said panelist Ram Ahluwalia, CEO and co-founder of PeerIQ, a financial information services company in the marketplace lending space.
  • Kansas was the first state to legalize equity crowdfunding (in 2011), said Michael Pieciak, commissioner of the Vermont Department of Financial Regulation.
  • The average age of a Betterment customer is 35, said Ben Alden, general counsel at Betterment.
  • “If a nation-state actor wants to penetrate a (financial institution), they will … nothing is ever secure,” said Nikhil Lele, principal in the Financial Services Office at Ernst & Young. A sobering note to end the day.

Conclusion

Chairwoman White told the audience the SEC has formed a “working group” to study FinTech, and that the group would be incorporating comments from Monday’s forum into their eventual recommendations. Kudos to the chairwoman and the agency for being so proactive. That said, on whose ears these recommendations will fall, and how they will respond, is, for the moment, anybody’s guess.

This is also a good point.
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