Notes from the SEC FinTech Forum

The SEC and its relatively newly established FinHub has started to have some outreach to the Fintech industry as their charter established when announced in 2018. A couple of months ago, they held their first FinTech Forum at the SEC headquarters in Washington DC. Not only was it open for the public but it was also streamed online for the whole day. I had watched most of the segments but given it was a work day, I had to leave off watching the missing pieces afterwards to get the big picture. Although out of date by now, I think it is always good to reflect on what they have been saying so we can better understand the signals and implications it will have in the innovative side on Finance and Technology in the coming years.

One clear picture that they established was the fact that the SEC and the participants unanimously predict that growth will continue to outpace traditional financial sectors in the coming years. Given the growth and capital that the sector continues to attract, they are in need of better understanding so that they can properly regulate to protect investors. However, they said that they cannot be the innovators but expect to work with those that do to assist and help with guidelines to do so in the proper framework.

They believe that with the growth and capital to the sector, disruption is inevitable. However, they believe that traditional players will increasingly become involved as the technology will be not only disruptive but beneficial to those in a traditional framework. The clear examples they highlighted would be "low-hanging fruit" were lower operational costs, streamlining securities transfers, and the tokenization of asset-backed securities. This would lead to the technology become an important part of key fundamentals of their oversight which are market integrity and capital formation.

The forum was held before the SEC had released their guidelines which continue to be based on the infamous Howey test to determine whether or not assets fall under the securities umbrella. However, they continue to signal that the funding aspect relative to development of the projects are at the center of their views on the subject of securities. They seem to have been working on models of tokens that fall in both sides to provide better guidance. The guidelines they published afterwards go into more detail (I still have to catch up on those as well).

The concept of wallet technology is one that has interested them as well although they mentioned that it continues to be an immature technology. However, I believe that like many technological advances these days, the velocity of development is far superior than those than we have seen in the past. Given the economy associated with money transfer, I am sure that we are only a handful of years away for this to be adopted broadly. Given its potential, the SEC stated that their intent is to provide a framework that will foster an environment of innovation and development so that projects need not look outside of the United States.

Their focus in the coming future will be around the need for disclosures to ensure that investors and participants are well informed in these projects. They are also watching for guidelines around identity and governance as they want to ensure that transparency helps participants be aware of updates so that investors can assimilate it to market forces. For this, they are also working on dispute resolution which they believe will slowly provide more guidance on proceeding into these ventures. Will they do not consider this to be as in depth as public markets, they believe that a hybrid of public and private will be necessary as the markets and technology matures.

In all, I think it was a good event that continues to demonstrate how relevant the technology of Blockchain and others are in the future of business and the economy. It is clear that FinTech will continue to have the attention of regulators as they seek to fit it into current frameworks as they mature which will lead to regulation for them in the longer term. A great point highlighted was how different global regulators are approaching the industry very differently despite the borderless and global concepts of most projects. This will not be an overnight action as it will take not only experience but multiple iterations to get it right.