Regulating Democratized Finance: Cryptocurrency, Retail Broker-Dealers and the SEC's Regulatory Perimeter

Abstract

The SEC has long been faced with the difficult task of regulating financial market innovations, and the rise of fintech has increased the complexities faced by the agency. As fintech entities grew in popularity among retail investors and moved financial markets closer to what some call “democratized finance,” calls for new regulations grew louder. After years of hesitancy, investigation and regulatory uncertainty, the SEC has been increasingly responsive to these calls.

This Note reviews and conceptualizes the SEC’s approach to regulating new developments in financial market access since the agency’s founding in the 1930s. This Note begins with a review of prior SEC approaches to regulation through either enforcement or the promulgation of new regulations, and then reviews how the agency has used these approaches when regulating two prominent fintech segments: online retail-broker dealers and cryptocurrency entities. Lastly, the Note proposes two frameworks to conceptualize historical and contemporary regulatory approaches by the agency. Ultimately, by reviewing prior instances of regulation, contemporary issues and frameworks, this Note aims to give greater clarity to how the SEC has and will continue to regulate financial market innovations, in particular as it relates to “democratized” financial markets.