The rapid growth of digital assets and computer-driven investment advice has become a key challenge for regulators in trying to keep up with technological advances while seeking to protect investors, a US markets regulator said on Monday.
Robert Jackson, a commissioner at the Securities and Exchange Commision, said the agency was seeking to enact laws that facilitate the changes in technologies.
One issue the SEC was grappling with was "robo advisors" - algorithms that help people make investment decisions.
"I know what it looks like when a human being commits fraud," Jackson told an Israel Securities Authority conference. "It's a lot harder to detect when an algorithm defrauds the investor. But investors deserve no less protection simply because money is being moved around by an algorithm."
Jackson, a Democratic commissioner who was a capital markets banker early in his career, said there were 4,000 lawyers at the SEC, but few programmers who can help explain how algorithms work and what risks they pose to investors.
"In 20 years we may need to be an agency of 2,000 lawyers and 2,000 programmers," he said.
Another struggle is regulating assets such as cryptocurrencies, which are "exciting but come with risks", he said. The aim was that the asset class does not become associated with fraud and investors are properly protected.
At the same time, the SEC is concerned that technology innovators increasingly are preferring private markets over public ones to raise large amounts of capital, largely because company founders have more freedom to run their companies with less accountability and transparency.
This poses a problem since many ordinary investors may be closed to many new tech firms.
"We might create a system of public companies that are not exciting. Instead that growth is reserved for a small section of society that can invest in private markets. That can be very unhealthy," Jackson said.
He proposes to improve disclosure from private firms by investing through intermediaries, which would mean investors would pay more but have lower risk.
Having strong regulation also translates into a lower cost of capital, he added.
Jackson also said he was in favor of more aggressive disclosures from companies when cyber attacks occur and that the SEC should partner with companies in combating cyber attacks.