Innovation vs. Regulation: Who Wins in the Deregulation Era?
We’ve now been through almost 2 months of watching things moving fast and breaking in the regulatory world, with no end in sight. Even the most powerful AI engine cannot predict the future, leaving us with the question of “what happens to compliance?” Will the shocks of deregulation and strong support for financial innovation fundamentally change the work of compliance teams, or perhaps cause them to shift budgets and attention elsewhere?
Let us unpack these questions and summarize where we’ve been and look at what potentially lies ahead.
Why it matters
With deregulation efforts and a strong push for financial innovation — particularly around AI and crypto — compliance teams face increasing complexity in balancing legal obligations with emerging technologies. The challenge lies in ensuring ongoing compliance with core requirements, while adapting to new priorities, reduced regulatory oversight, and potential budget shifts. Understanding these dynamics will help compliance teams remain effective in safeguarding fiduciary responsibilities and mitigating risks in an uncertain environment.
How did we get here?
It is impossible to keep up with every proposed change, executive order, or Department of Government Efficiency (DOGE) activity that directly impacts financial regulatory structures. What we do know is this: the days of “regulation by enforcement” are over. Agency nominees and appointees Paul Atkins (SEC), Jonathan Gould (OCC), Brian Quintenz (CFTC) and Jonathan McKernan (CFPB) all echo the same message – a return to the “normal” days of enforcement, focus on financial crimes, and encourage innovation in areas including artificial intelligence and crypto.
However, predictions are virtually useless in determining the outcomes of several executive orders and DOGE activities, including:
- Review of Regulatory Agencies (2/18): extends White House control over independent agencies, including SEC, and FTC. Move to reduce agency autonomy almost certainly faces a long set of battles in the courts
- Prosperity through Deregulation (1/31): calls for a 10x1 regulatory reduction
- Digital Financial Technology (1/23): proposes federal regulatory framework for digital assets
- Trump announces Stargate (1/22): $500M joint venture with OpenAI, Oracle, Softbank to build AI infrastructure
- DOJ shifting focus to Cartels & Transnational Criminal Organizations(TCOs) (1/20): order pauses pursuit of cases under the Foreign Corrupt Practices Act (FCPA) to determine “if American businesses are put at a competitive disadvantage by not being able to engage in the practices of our foreign adversaries”
This, coupled with activities of DOGE, which was formed only 4 months ago and yet has already embedded itself in 15 federal agencies, proposing staff cuts in 7. Most notably, DOGE has effectively halted the operations of the Consumer Financial Protection Bureau (CFPB), suspending all supervisory and enforcement activities including enforcement of consumer protection laws such as credit card and loan application disputes. The targeting of the CFPB has 2 explanations:
- Criticism that it has engaged in “regulatory overreach” in returning more than $20B in settlements to consumers since its inception
- It would be the regulatory authority to govern digital payment platforms that several tech firms are interesting in pursuing
What do we mean “deregulation”?
This question has several dimensions, starting with the reality that the average number of SEC enforcement actions under Gensler actually decreased per year in comparison to both the Trump I and Obama administrations (706/year average vs. 788 and 740 per year, respectively). While the average penalties levied per year did increase under Gensler ($5.4B/year average versus $4.2B and $3.9B under Trump I and Obama, respectively), those numbers were inflated by a few high profile crypto cases along with the large off-channel communications settlements. So, as stated by Acting SEC Chairman Mark Uyeda, we may be in for a “return to normal” under the new administration versus outright “deregulation.” Other aspects of this question to consider are:
- The pace of new rule making, which will very likely result in a slowdown of new rules and shelving of the 20+ outstanding Gensler proposals including the Predictive Data Analytics rule;
- Shift in priorities, away from Gensler’s focus on regulation of crypto (where two open cases have been dismissed), ESG disclosures, and technical violations and toward cases directly tied to investor harm or fraud;
- Unclear impact of budget and staff cuts, where the actions of DOGE to enact headcount reductions and budget freezes will continue to play out in courts, but could ultimately impact the ability of regulators to pursue new enforcement cases;
- Multiple steps required for major structural change, such as a proposed restructuring or elimination of regulatory agencies such as CFPB will require a number of events including congressional action, modification of Dodd-Frank, or rulings from higher US courts;
- Regulatory burden shifting to states, as the Federal enforcement postures shift, US states may attempt to ‘bridge the gap’, enacting legislation to offer protections in emerging areas of technology including artificial intelligence. The result: greater complexity, contradiction, and overlap for firms to manage, even in an era of “deregulation”
How will this impact innovation?
What has been made abundantly clear is this administration’s focus on driving innovation in financial services. Trump vows to make the US the “crypto capital of the world”, supported by crypto-friendly agency leadership, advisors including Mark Andressen and Elon Musk, and newly appointed “AI Czar”, David Sachs. Elimination of uncertainties regarding regulatory responsibilities and the end of active SEC enforcement of crypto cases has potential to increase demand in crypto controls amongst both financial technology and global banks.
Similarly, the shelving of the SEC Predictive Data Analytics proposal, the Treasury Department’s digital asset framework and 2023 Biden AI Executive Order all point toward enhancing the US position of AI leadership. The specifics of how this will incent financial services firms to increase investments in AI are unclear but may be guided by the development of its AI Action Plan and release of additional details related to Stargate.
Does deregulation + innovation trump compliance?
Ultimately, do these actions fundamentally change the mission of compliance or, at minimum, cause a shift in priorities and budgets? Our read is that the mission of compliance is unchanged. Firms remain obligated to fulfill fiduciary responsibilities, protect sensitive client information, and become more effective in identifying and acting upon financial misconduct. Core recordkeeping and communications requirements remain regardless of administration, and any significant deprioritization implemented in 2025 may have consequences in 2028.
As far as budget are concerned, there are those who may opt to do only what is mandated in the letter of regulation and will seek opportunities to be more cost-efficient in meeting those obligations. However, we believe the majority will react to today’s regulatory uncertainty as a call for greater flexibility and agility. That nimbleness will not only allow them to pivot in response to further developments in regulation, but also to capitalize on the opportunities that AI and crypto can bring to their businesses. This focus will bring them back to the basics of building the required guardrails and improving compliance effectiveness in true derisking of information, and away from “check the box” compliance.
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