tl;dr: The desired outcome is noble, but the SEC’s latest regulatory initiatives only serve to highlight the inherent weaknesses when compared to the native strengths of crypto-economic systems..
There was an op-ed in the WSJ a few days ago by the current SEC Commissioner, Jay Clayton entitled Shareholders Should See How Votes Are Swayed: Proxy advice businesses are shaping outcomes for ordinary investors. Any conflicts must be visible.
There were a number of really interesting quotes:
“the people who vote shares should have access to a detailed mix of accurate and actionable information“
https://www.wsj.com/articles/shareholders-should-see-how-votes-are-swayed-11595431222?mod=searchresults&page=1&pos=1
and
“One fundamental aim of market regulation is to foster the disclosure of timely, accurate and complete information that is material to investment and voting decisions.
Another is to define and enforce obligations on market professionals—including the people who manage investments for others.
In the case of our proxy voting system, the time has come to reaffirm and reinforce those principles.”
https://www.wsj.com/articles/shareholders-should-see-how-votes-are-swayed-11595431222?mod=searchresults&page=1&pos=1
and
“The purpose of these new rules is to generate a more transparent proxy voting system, where the additional information provided will both better inform voting decisions and facilitate compliance with fiduciary obligation“
https://www.wsj.com/articles/shareholders-should-see-how-votes-are-swayed-11595431222?mod=searchresults&page=1&pos=1
There’s a lot here to unpack and Clayton/SEC’s heart is in the right place.
He rightly wants to continue the long, proud American tradition of having the most transparent, trusted markets in the world.
That is not something to scoff at. While things in the US are far from perfect, one of the key drivers of the economy for most of the past century has been global trust in the US markets for securities.
However, as Clayton points out, the current framework for public markets was built “more than 8 decades ago.”
The problem he has identified is something that we touched on briefly, albeit tangentially, a few weeks ago in The Disintermediation of Securities Lending.
Bottom line, as Clayton points out it, is that “most small and midsize investors participate in our public markets through intermediaries,” which is why this reform is necessary, according to the SEC.
A Faster Horse
As I read this article, I could feel myself getting mildly triggered, but that wasn’t the primary reaction.
It was more a feeling of continuing to watch the changing of the guard for financial systems happening in slow motion.
Clayton’s heart is in the right place. Everything he and the SEC are asking for is totally fair. However, the answer is the same it has been for 8 decades: “more regulation.”
I’m not anti-regulation at all. I’m in favor of it. What concerns me is the cost and burden associated with regulation and what it does to the very markets it is supposed to serve.
I remember, back in the mid-2000s, the Sarbanes-Oxley Act was passed and with it, an enormous regulatory burden, which only the richest companies could afford.
The same, as Ben Thompson has pointed out many times, is even more true with the cost of GDPR compliance for data companies.
I am sure there are studies out there, but this cost of regulation imposes a burden on firms which crowds out the smaller ones, leaving fewer and fewer options for investors. We’ll probably see a wave of consolidation around these markets as the regulatory burdens increase.
My issue with this is that Clayton is delivering a “faster horse.” More of the same.
Of course, he doesn’t really have a choice given the existing infrastructure for the financial system.
Meanwhile, in Crypto Land
Not only has the Decentralized Finance market grown from $1 billion of locked assets at the beginning of June to over $3.5 billion as of the time of this writing, there are now at least 8 different protocols with more than $100 million of value locked in them.
Each of these protocols comes standard with
- access to a detailed mix of accurate and actionable information
- disclosure of timely, accurate and complete information that is material to investment and voting decisions.
- a more transparent proxy voting system
Are they perfect today? Of course not.
Are there other issues, you bet they are.
But, does the very thing that Clayton wants exist natively in open-source, decentralized markets running on public blockchains?
Oh yeah.
This is the innovation.
Same, but Different
Crypto represents a way to deliver functioning, trusted, open, accessible, fair markets to everyone (not just American investors) everywhere 24/7/365 where the regulation comes as part of the operating system.
What’s more, the regulation is managed by a community of people with vested interest in the success of the market, such as MKR holders for Maker, COMP holders for Compound, etc.
And, because the governance around the protocol lives on the blockchain, updatable by a community vote, there is far greater market agility to respond to issues that affect the value of the network.
[To be fair, some of these smart contracts are still centrally controlled so the promise isn’t quite there yet].
This is why crypto-economic systems will win. They deliver the same outcome (trusted, transparent markets) as the SEC, but they (eventually) will do it better, faster, cheaper.
Today, crypto is like a Model T. The SEC is a horse.
