US SEC Committee member: Is the more regulatory data collection the better?

Editor: This information is posted on the website of the United States Securities and Exchange Commission (SEC) and is a speech delivered by SEC member Hester M. Peirce at the SIFMA Digital Asset Congress.

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The text of the speech reads as follows:

Thank Ken and SIFMA for inviting me here at the penultimate week of my term as a member. Perhaps the title of this meeting should be “A regulatory perspective towards the end.” Even if time is running out, I will still have to take responsibility for the exoneration statement, so let me state first that my view is that I am a member, not necessarily representing the position of the SEC or others.

Before I turn to the main topic — rethinking financial regulation in the context of old problems and new technologies — allow me to take a moment to discuss the “innovation exemption” that we announced last week. In fact, the innovation exemption is a limited-time and scale exemption aimed at trading tokenized securities on an encrypted network through automated market vendors. As President Atkins explained, this is the bridge to lasting rule-making. We welcome comments on the rules of immunity, and I am grateful that SIFMA has used this invitation to provide an initial response. In developing the exemption clause, we seek not to disrupt the smooth functioning of the stock market but to ensure that the introduction of monetized securities does not disrupt the world ' s best stock markets. I would rather achieve it here, as the monetization is approaching, than offer United States stock currency openings in overseas markets without a US alternative. The goal is to develop a set of final rules to regulate situations that are not covered by existing regulatory frameworks and to promote intermediary institutions and trading platforms for the exchange of tokenized securities. I share SIFMA's desire to start the rule-making process as soon as possible. The exemption is only part of the commitment that I hope the Commission will continue and move forward in working with market participants to use new technologies to empower and protect investors.

However, hugging is not easy to change. And I'm moving to Virginia Beach, and despite initial enthusiasm for these possibilities, I find the change rather unpleasant. The potential new place of residence I have seen has instead made me more eager to remain in place. Traffic and road construction have become more frequent, the landscape has become less green and the sun-filled apartments have already been sold out. Uncertainties in the lives of new places make old places unrealistic. While some of my concerns about the impending relocation are legitimate, excessive anxiety may also lead to neglecting the real possibilities of change.

The introduction of new technologies is often not only surprising and exciting, but also a source of fear and anxiety as the reality emerges. That is, people dream about the possibility of new technologies, and they raise legitimate questions, such as their potential harmful consequences and the possibility that bad actors can use technology to threaten society.

In addition to addressing the issue of technological malfeasance, we need to raise a number of issues to ensure that technological change is not unduly constrained. Are protective measures motivated by good will resulting in harm to people by denying them access to new technologies that improve their lives? Are restrictions designed to prevent the use of technology by bad people causing unnecessary inconvenience to good people? Does regulation around the use of new technologies prevent Americans from making choices for themselves and their families? Are attempts to place new technologies in the grip of a set of normative rules premised on old technologies and stifle their potential to transform societies?

These questions, both on the downsides of moving forward and on the consequences of stagnation, are closely linked to the technology being developed in a encrypted world. Today I would like to focus on encryption tools such as digital identity systems and decentrized networks.

Today, societies are at a crossroads. One is the status quo: more data collection, more brokering surveillance, more “know your customer” requirements, which make our financial trail a panoply of surveillance.

Just as too many encryption lovers are unhealthyly attached to “data growth”, there are too many people in the regulatory sphere (not only government workers, but also a large number of non-governmental data collectors) over-resort to “data growth”. The more data the Government and its private sector agents collect, the better they can be. Excessive regulatory attention to data accumulation is often derived from the inherent protective instincts. However, sometimes humans prefer to know what their people are doing or fear that regulators will be blamed for unforeseen problems, which prompts government data absorption. Once a government has started collecting data, the reasons for stopping collection often give rise to incomprehensible resistance: if you love the United States, hate crime and financial crises, how can you expect less information from the government? It has become a reality that the Government is accumulating personal information without following up on the initial legitimacy of gathering such information. The collection and preservation by Governments of all types of personal and confidential business data increases the likelihood that government or private institutions will inadvertently or intentionally mishandle them. The endless demand for data obscures the real value of any specific data point and ignores legitimate concerns about personal privacy or business confidentiality.

Understanding your client (KYC) and anti-money laundering (AML) frameworks is based on a simple theory: if financial institutions collect enough information, as required by regulation, to be sufficiently numerous, to detect hidden criminals in the majority of law-abiding countries. We build an increasingly large data sea that we think will find one or two needles inside. But, with larger seas, it is harder to find needles.

Look at the actual structure of the sea. Financial institutions that comply with government requirements conduct customer identification programmes (“CIPs”) to collect and verify information on names, birthdays, addresses and identification numbers of potential customers. The obligation of continuous monitoring requires financial institutions to keep abreast of the nature and purpose of their customer relationships and activities. When something appears to be abnormal, even if it has exceeded a specific regulatory threshold, financial institutions are required to submit currency transaction reports (“CTRs”) and suspicious activity reports (“SAR”). Each document contains detailed personal and transactional information. You know the process and how expensive it is to monitor and report clients. The cost of operating the system appears to be far greater than its effect on deterring malicious actors. We also pay little attention to the costs borne by innocent people and businesses whose information is unwittingly tracked, accumulated in the sea and may even be attacked by hackers.

For decades, the way in which illicit funds are exposed and the financial system is used to promote other illegal activities has been the same: collecting more and more data. This approach is not working optimally, technology has outpaced our traditional methods, so it is time to change. Public books are more transparent than any paper record, and they are harder to tamper with.

New technologies provide us with real opportunities, not just excuses for deregulation. For example, a certificate based on attributes allows individuals who hold verifiable documents to prove certain facts: age, nationality, identity of qualified investors, non-listing, etc. without disclosing the underlying data that generated these facts.

Tools exist to limit the types of information individuals need to provide, as well as the number of entities that must provide them. What is lacking is a regulatory framework that supports and encourages their use.

We need to move the Federal Government and its regulatory bodies from prescription collection requirements to technically feasible, attribute-based certification. We should look at the rules from a new perspective and ask each step: do we really need this particular information? Do we need only know a specific fact that this information is precisely proffering? Is the threshold for gathering information on a particular transaction too low? (In answering this question, we need to resist the temptation of lowering thresholds based on the ability of new technologies to collect large amounts of data easily and cheaply). Finally, if we really need some information, do we need to collect it from multiple companies?

In connection with the last issue, we should simplify the reliance of registered entities on third-party identification for the purposes of the CIP. Currently, with a few exceptions, our CIP rules usually require each regulated entity to independently collect and verify customer information even if the client has been reviewed by other registered entities. Such repetitive collections mean that sensitive information of the same individual is copied, stored and exposed to risks in dozens of institutions. If the customer has been certified by a regulated and credible entity, why not allow follow-up agencies to rely on this work and become normal? This is a very suitable field for experiments, and potential cost savings are quite significant for companies like you.

In the light of new technologies, we should also ask another question: do we force intermediaries into a situation simply because we want to gather information? The Government relied on intermediaries to collect data, but some new technologies operated without intermediaries. Governments must adapt their methods accordingly. Intermediaries will continue to play a central role in our financial system, but they and their clients and counterparties may use de-brokering tools without permission. When core protocols of the network operate through automated and non-molecable codes, rather than discretionary behaviour by identifiable parties, there is no hosting intermediary between users and their assets, and all participants and transactions are treated in a neutral manner, the network becomes truly unauthorized. This base level infrastructure allows us to reduce unnecessary data collection while maintaining (and even enhancing) transparency in the bottom-level transaction records. A public blockchain network usually generates permanent, open and auditable books for each transaction, which law enforcement can analyse through increasingly sophisticated blockchain forensic tools.

With new technologies, we can better protect people’s data and eradicate illegal practices. The trade-off will continue without the temptation to use them in a way that free people’s governments do not have.

Thank you for your attention today and for the many interactions we have had over the years. We do not always agree, but you are willing to listen and counter when you think I am wrong, which will help me better in my work.