On the 5th October U.S. Securities and Exchange Commission announced the launch of its newest branch called Strategic Hub for Innovation and Financial Technology (FinHub). This body also aims at public engagement as it will function as a meeting point of the SEC, innovators, developers and entrepreneurs. The areas under its scrutiny will include blockchain technologies, artificial intelligence, machine learning and digital marketplace financing. Let us highlight some key points of the SEC’s relationship to fintech.



The SEC states that investors in Initial Coin Offerings (ICOs) have certain rights under the federal securities laws, but the ability to recover any lost funds may be limited. If traditional financial institutions are not involved, it is difficult to trace the flow of money. Since ICOs can be international, it takes longer for the SEC to get information from foreign jurisdictions, and in some cases it is even impossible. Decentralization of blockchain makes regulators rely on sources other than central authorities to the great inconvenience of investigators. Freezing and securing funds are a challenge as there may be no third party custodian of the encrypted digital wallets to contact.

Because of the above-mentioned features, the SEC finds the crypto environment challenging and advises investors to be on the lookout for the following signs of investment fraud:

  • Guaranteed high investment returns with no risk – an impossibility in the financial world. If it sounds too good to be true, it should raise a red flag.
  • Unsolicited offers, i.e. offers you did not look for by unknown senders. Another sign often accompanying unsolicited offers is putting pressure on clients, claiming they should invest immediately or miss the chance.
  • Unlicensed individuals and unregistered firms making a pitch should also be a red flag.
  • Private investment opportunities not requiring any accreditation or income information should be regarded as highly suspicious.

The recent emergence of Security Token Offerings (STOs) is a new incarnation of ICOs. Tokens issued via STOs will be treated as securities which brings them under the purview of SEC, but at this stage it is too early to declare this as a solution to token regulation. The financial world will have to wait for the SEC’s official stance.



The regulation concerning automated asset management stipulates an appointment of a chief compliance officer to oversee and administer the regulator’s policies. In the SEC’s view, automated financial advisors are exposed to additional risk because of their reliance on algorithms. Written policies and procedures should be in place to address certain issues.

SEC identifies these issues as the following: Any algorithmic code should be adequately tested and its performance continuously monitored. Clients should also be informed about all changes to the code that could affect their portfolios. A procedure that establishes if the service meets the client’s investment goals including his financial adequacy should be a part of the standard KYC procedure. Third party oversight of the service is required, as should the identification and prevention of cybersecurity threats.



To keep pace with the rapidly advancing application of automated practices in finance, regulators have developed two new fields of engagement: Regulatory Technology and Supervisory Technology (RegTech and SupTech). SEC is using open source software for data analytic to identify market misconduct and has no need for proprietary solutions, said their Deputy Director of the Division of Economic and Risk analysis, S.W. Bauguess. The SEC identified the readability of decision-relevant information as its biggest challenge. This information goes beyond mere numerical data and encompasses metadata or contextual data; this type of information can yield valuable results, but only if the format is such that allows large-scale consumption of data quickly and efficiently. At any rate, RegTech and SupTech are still in the initial stage of development, and regulators expect great benefits from them, ranging from lower costs to enhanced regulatory compliance.



The confluence of various fintech segments, such as machine learning, automated advice and artificial intelligence is making regulatory activities faster, easier and more efficient. It will be interesting to observe if the future can produce another gap between innovation and regulation such as the one that occurred around blockchain technologies in recent years, and which led to a lot of fraudulent activities casting an unflattering light on an emerging technology of great potential. Considering all of this, one should also be aware that regulation did not prevent the formation of the infamous dot.com bubble of the 90s.

Image source: Shutterstock


David Prezelj
David Prezelj

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