What role has the SEC historically played in shaping the U.S. capital markets? What factors have contributed to the SEC’s recent struggle to adapt to innovation, particularly in the cryptocurrency space? How can the SEC ensure its approach to financial regulation remains relevant in an evolving technological landscape?
The U.S. Securities and Exchange Commission has long been the world’s most influential financial regulator, helping to ensure our capital markets are the deepest, fairest, and most accessible in the world. But its continued relevance will depend on whether it can do more than merely respond to innovation — it must proactively foster it.
For nearly a century, the SEC has adapted to evolving markets, new technologies, and greater retail participation. In its best moments, the agency has embraced innovation in service of transparency, investor protection, and capital formation. However, in recent years, it has strayed from that legacy — nowhere more visibly than in its approach to crypto and blockchain.
The good news is, with a change in leadership and a more open posture emerging, the SEC has a chance to course-correct. But the bigger question is: how do we make that change permanent? How do we build innovation into the SEC’s DNA so that the next promising financial technology isn’t strangled in its crib?
I spent nearly six years at the SEC, first as a Senior Counsel in the Division of Enforcement and then as Chief Counsel in the Office of Legislative and Intergovernmental Affairs. I’ve since held senior legal and policy roles in crypto firms across the ecosystem. From both perspectives, one thing is clear: the SEC can fulfill its mission more effectively — and maintain its global leadership — only if it becomes a proactive partner in financial innovation.
The SEC at Its Best
The SEC has a proud history of embracing change to the benefit of investors and markets alike. In the 1990s, it digitized corporate filings through EDGAR, replacing paper documents with searchable databases. It later approved Regulation ATS, enabling the rise of alternative trading systems that increased competition and liquidity. ETFs, which were once novel, are now mainstream products that offer low-cost, diversified exposure to a wide range of assets. More recently, fractional-share trading has empowered millions of retail investors to own a slice of companies they once could only admire from afar.
One especially relevant example as the SEC thinks about how to regulate crypto is the agency’s treatment of asset-backed securities. In the 1980s and 1990s, the SEC recognized that these complex financial products didn’t fit neatly into existing disclosure regimes. After years of study and no-action letters, it developed a tailored disclosure framework in 2004 — refined further in 2014 — that balanced innovation with investor protection. And it didn’t need to bring hundreds of enforcement actions to do it.
When the SEC Fell Behind
There are also times the SEC failed to adapt, to the detriment of both investors and markets. It was slow to respond to the rise of high-frequency trading, contributing to the 2010 Flash Crash. It took years to implement the crowdfunding rules authorized by the JOBS Act. It lagged on digital reporting standards, delaying broader access to market data.
For much of the last few years, its stance on crypto veered from caution to outright hostility. Instead of issuing clear rules for digital assets, the agency pursued a scattershot enforcement campaign — often against firms that were seeking to comply in good faith. Many of these actions didn’t even involve fraud or investor loss. Meanwhile, American crypto companies fled overseas, and a global industry flourished without us.
Even the SEC’s grudging approval of spot bitcoin ETFs in 2024 came only after it was forced by a federal court. And while the agency at one point talked about creating a crypto disclosure framework akin to what it did for ABS, it never followed through.
Innovation Isn’t the Enemy
Crypto may be new, but the SEC has faced this challenge before. It knows how to modernize its rules to meet new realities. What’s different now is the opportunity to leverage innovation — not just regulate it.
Take blockchain technology. It could enable near-instant trade settlement, reducing risk and freeing up capital. It could improve market transparency through immutable records and real-time transaction data. It could lower operational costs by reducing intermediaries. And tokenization could expand access to private markets and hard-to-reach asset classes, benefiting both issuers and investors.
Ironically, the SEC hasn’t seriously explored how blockchain could improve its own market oversight. That’s a missed opportunity. But it’s not too late.
A Blueprint for the Future
So what would it look like to build innovation into the SEC’s core mission?
- Revise the SEC’s Mandate: Congress should amend the Securities Exchange Act of 1934 to explicitly include the promotion of innovation and modernization, alongside investor protection, market integrity, and capital formation.
- Rethink Metrics of Success: The SEC shouldn’t measure success solely by the number of enforcement actions or penalties collected. It should also look to capital formation, investor confidence, and the safe adoption of new technologies.
- Create an Innovation Office: A dedicated, empowered team should engage with entrepreneurs, technologists, and academics to guide responsible innovation — just as similar offices in the U.K. and Singapore have done.
- Adopt Risk-Based Regulation: Not every new product or platform needs full regulatory treatment on day one. Pilot programs, safe harbors, and regulatory sandboxes can help innovators test ideas while maintaining appropriate guardrails.
- Invest in Education and Training: SEC staff need better fluency in emerging technologies. Cross-disciplinary expertise should be rewarded and cultivated.
These are not radical ideas — they are proven tools drawn from the SEC’s own playbook.
In a global race to define the future of finance, the SEC has a choice: lead or fall behind. Its greatest strength has always been its credibility and ability to adapt.
The next generation of investors and entrepreneurs won’t wait around for 20th-century rules to catch up to 21st-century innovation. Nor should they have to. If the SEC wants to remain the gold standard, it must adapt once again — not just to the present, but to what comes next.
5 Ways the SEC Can Embrace Innovation
The U.S. Securities and Exchange Commission (SEC) plays a critical role in ensuring the integrity of the financial markets. However, as the landscape of finance continues to evolve rapidly due to technological advancements and emerging business models, the SEC faces the challenge of balancing investor protection with the need for innovation. To stay relevant and effective in this dynamic environment, the SEC must embrace innovation in its operations, regulatory practices, and technology initiatives. Here are five ways the SEC can do just that.
1. Leverage Technology for Better Compliance and Oversight
The SEC should adopt advanced technology to enhance its surveillance and compliance capabilities. By utilizing artificial intelligence (AI) and machine learning algorithms, the SEC can process vast amounts of data, identify trading patterns, and detect fraudulent activities in real-time. This proactive approach enables the SEC to pinpoint irregularities before they escalate into significant issues, thereby protecting investors more effectively.
Additionally, blockchain technology presents a promising opportunity for the SEC to enhance transparency and security in transactions. By leveraging distributed ledger technology, the SEC could streamline reporting processes, improve record-keeping, and enhance the overall integrity of financial markets. Such innovations would allow for more efficient and effective regulatory oversight.
2. Foster a Regulatory Sandbox for Fintech Startups
Innovation often occurs at the intersection of technology and finance, and fintech startups play a crucial role in this evolution. However, the regulatory landscape can stifle their growth, as many startups lack the resources to comply with existing regulations while developing their products. The SEC can create a "regulatory sandbox" to provide a controlled environment where fintech startups can test their products and services without facing the full burden of regulatory compliance.
A regulatory sandbox would allow these companies to experiment with innovative solutions under the SEC’s supervision, fostering collaboration between regulators and innovators. By promoting an environment of mutual understanding, the SEC can stay informed about emerging technologies and their implications for the financial markets, ultimately leading to better regulations that support innovation while ensuring investor protection.
3. Enhance Communication and Engagement with Stakeholders
To embrace innovation effectively, the SEC must improve communication with market participants, including investors, companies, and technology developers. By establishing regular dialogue and outreach efforts, the SEC can gain insights into the challenges and opportunities facing various stakeholders in the evolving financial landscape.
Public forums, workshops, and industry roundtables can create platforms for exchanging ideas, garnering feedback on regulatory proposals, and discussing best practices for innovation. Moreover, these engagements can help the SEC better understand the technological advancements and industry trends that are shaping financial markets. By incorporating stakeholder input, the SEC can craft regulations that are more adaptive to innovation and the needs of market participants.
4. Update Regulatory Frameworks to Accommodate New Business Models
As new business models emerge, particularly in the digital economy, the SEC must update its regulatory frameworks to remain relevant. Crowdfunding, initial coin offerings (ICOs), and decentralized finance (DeFi) are just a few areas that require regulatory attention. The SEC should assess existing regulations and identify areas that may be outdated or inadequate for addressing the unique characteristics of these new business models.
Moreover, the SEC can develop guidance that clarifies how existing regulations apply to innovative financial products and services. This proactive approach not only provides clarity to market participants but also encourages innovation by signaling that the regulatory environment is adaptable to change. By ensuring that its regulatory frameworks align with current market practices, the SEC can foster an environment where innovation thrives while maintaining its commitment to investor protection.
5. Collaborate with International Regulatory Bodies
In an increasingly globalized financial system, the SEC should actively collaborate with international regulatory bodies to share insights and best practices regarding innovation. Cross-border cooperation can facilitate a more comprehensive understanding of global trends in finance and technology, enabling regulators to address the implications of innovation on a global scale.
By participating in international forums and initiatives, the SEC can learn from the experiences of other regulators who are also grappling with the challenges of innovation. Creating common frameworks or principles for regulating emerging technologies can enhance consistency and compliance across borders, ultimately leading to a more stable international financial system.
Conclusion
The SEC stands at a crossroads in its mission to protect investors while fostering a vibrant and innovative financial market. To successfully navigate this terrain, the SEC must embrace innovation in various dimensions, from leveraging technology and fostering fintech startups to enhancing stakeholder engagement and updating regulatory frameworks. By collaborating with international regulators, the SEC can ensure that its approach remains relevant and effective in an ever-changing financial landscape. In doing so, the SEC will not only uphold its mission but also promote the growth of innovative solutions that benefit all market participants.
Promote Regulatory Sandboxes: The SEC can establish regulatory sandboxes that allow fintech and blockchain companies to test their innovations in a controlled environment. By providing a space where startups can develop and refine their products under the SEC’s watchful eye, the agency can encourage innovation while maintaining market integrity.
Enhance Collaboration with Innovators: Developing closer partnerships with industry leaders and innovators can help the SEC understand emerging technologies and trends. Regular workshops or roundtable discussions with tech experts can foster dialogue and ensure that regulations evolve in line with innovation.
Leverage Data Analytics: By incorporating advanced data analytics and artificial intelligence into its operations, the SEC can better monitor market activities and investor behavior. This technological integration can improve market oversight and streamline compliance processes for companies, thereby encouraging innovation.
Streamline Approval Processes: Simplifying and expediting the approval processes for new financial products and services can significantly encourage innovation. The SEC could adopt a more flexible approach, allowing for quicker responses to new market developments while ensuring consumer protection and market stability.
- Educate Stakeholders on Emerging Trends: The SEC can take a proactive approach in educating investors and market participants about new technologies and their implications. By providing resources, guidelines, and educational initiatives, the agency can foster a more informed ecosystem that embraces innovation responsibly.