How to prevent the next GameStop disaster


How to prevent the next GameStop disaster

The mind-numbing inanity of last week’s GameStop hearing on Capitol Hill was just as predictable as the worthless result. Of course members of both pa

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The mind-numbing inanity of last week’s GameStop hearing on Capitol Hill was just as predictable as the worthless result. Of course members of both parties wanted in on the media frenzy surrounding Robinhood and WallStreetBets, the Reddit forum where thousands of amateur investors mounted a historic campaign to pump (and dump) the stock of a left-for-dead video game retailer. Talking heads on CNBC were alarmed, and so the House Financial Services Committee ordered hearings, subpoenaed witnesses, and played for the cameras at every turn. By the end of last Thursday’s spectacle, the consensus was clear: We learned absolutely nothing.

Not surprisingly, Congress focused on the wrong culprit. Yes, Robinhood’s marketing as “the platform for the average investor” ended up conflicting with their treatment of the average investor once they had to stop taking GameStop trades, making them look like greedy hypocrites. (Fast Company has a brief explainer here.) And yes, the use of Reddit and Twitter to drive market forces and propel certain stocks is new and a little scary.

But Robinhood, Reddit, and Twitter were all using their platforms in the exact ways they were intended: to spread and drive information and access. If there’s a villain in the GameStop saga, it’s the federal regulators—in this case, the Securities and Exchange Commission (SEC)—who failed to notice that the world was changing and didn’t bother to update the rules accordingly.

By definition, regulation will always lag behind innovation. Regulators can’t know what rules are needed until an entrepreneur first thinks of the new idea, turns it into actual technology, turns that technology into a business, and then starts selling its product or service. But once that happens, it’s not necessary to wait for a debacle before updating the rules. In the case of GameStop, the two-day settlement requirement meant that Robinhood couldn’t keep taking trades absent raising more capital.

That two-day waiting period made sense in a previous era—one before blockchain and the cloud. But that waiting period still exists because of inertia and complexity—and, historically, because it produced extra revenue for brokerages—not because it’s technologically necessary. Real-time settlement is not only feasible, it would have prevented all of the harms caused to Robinhood’s investors. The SEC knows that, but it didn’t act on it. That was a mistake.

GameStop is but one example. Take something more significant like self-driving cars and trucks. Even though autonomous vehicles offer vast potential to save lives, time, and money, the government and the industry are in a state of mutual paralysis. The U.S. Department of Transportation, under the Trump administration, simply refused to deal with the issue. Rather than creating a regulatory framework for autonomous vehicles, they did nothing. That means interstate autonomous travel is largely illegal and the ability to introduce self-driving cars and trucks to the market is extremely limited. It’s impossible to fully develop and deploy autonomous cars and trucks if you can’t test them in all situations, and especially if they’re never allowed to cross state lines. As a result, nothing happens. That isn’t helping anyone.

Technology and regulation can’t each develop in completely separate vacuums. It’s not the role of government to predict which technologies will and won’t work, but once a technology in a regulated industry—finance, insurance, transportation, health care, or education—starts gaining traction, public servants can’t pretend it isn’t happening. There’s nothing prohibiting regulators from learning about new technologies in their field, seeing what has momentum among investors and consumers, and then intelligently acting on these new developments so that the laws address the market as it exists today, not as it was 10 years ago.

Nor does the process have to be painful. There’s no rule of nature that decrees that every interaction between startups and government has to be hostile. Startups gain traction when consumers want to use their products. Once consumers have voted with their wallets, that should be a clear signal to regulators that their constituents want to be able to use whatever this new product or service is.

At that point, rather than just telling the startup that they can’t operate because the law never contemplated their approach—to selling insurance or taking online bets or letting people use electric scooters—it’s incumbent on regulators to figure out how to make it work. In other words, take the time to reach out to the startup in question and work with them to figure out how to update the laws. Threatening them because they didn’t seek your permission is counterproductive. Telling them that the market is not a reflection of what the voters want is disingenuous. Trying to shut them down because the entrenched interest being disrupted gives your boss (i.e. the politician who appointed you) money is corrupt. Pick up the phone or send an email or a text or a DM and say “let’s figure this out together.” It’s not that hard.

Startups that treat the government as the enemy and refuse to participate in the democratic process are wrong to do so. And regulators who imperiously lord their power over startups for no good reason are kind of pathetic. When either party behaves that way, it defeats the underlying purpose. Startups don’t spend time and money to develop a new idea just to have it stopped because of regulation. Regulators don’t serve in office just to prevent anything new from happening.

Everyone, on both sides, is supposed to want to use their talents to make things better, easier, faster, and cheaper. Now that everyone’s focused, we’ll probably see action from the SEC to permit real-time settlement and prevent another GameStop. But it shouldn’t have come to this. And for the thousands of other technologies out there beyond real-time settlements, it doesn’t have to. A little mutual respect, a little willingness to swallow your ego, and some hard work can solve the problem. There’s no excuse not to do it.

Bradley Tusk is a venture capitalist, writer, philanthropist, and political strategist. Tusk Ventures has invested in some of the industries referenced in this column including online gambling, electric scooters, and blockchain technology.