By Jo Ann Barefoot, CEO and Co-founder of AIR
January 24, 2025 (Adapted from the Barefoot Innovation Podcast show)
Vladimir Lenin is credited with saying, “There are decades when nothing happens, and weeks where decades happen.” The statement captures the deep truth that big change is usually slow, but is occasionally very fast.
As with the Russian Revolution, the slow and the fast are not usually unrelated phenomena. Sometimes sudden change is exogenous, like an asteroid hitting the world of the dinosaurs, but more often, its causes have been accumulating, slowly, during the times that seem inert. When the slow changes build to a tipping point, or hit a trigger, the backlogged force rushes through, like a dam break. My favorite quote on this pattern is a passage in Ernest Hemingway’s novel The Sun Also Rises, where a character is asked how he went bankrupt and says, “At first gradually, and then suddenly.” There is cause and effect underway, but the cause, with its slow evolution, has gone unnoticed.
And there’s another pattern that’s often working, unseen, behind seemingly sudden moments of change. In many cases, change is slowly advancing concurrently in multiple parallel channels – very often in spaces that seem unrelated to each other. And then, unexpectedly, these streams converge and, voila la, they cause or enable something new, something bigger than any of the component trends.
This is especially true with technology change. So often, innovators are doing their long work inside their silos, unaware that other people, in other fields, are also building or discovering something that will soon merge with theirs. An example of tech convergence that I love is in the book The World is Faster Than You Think, by Peter Diamandis and Steven Kotler. They note that people have predicted flying cars for as long as we’ve imagined human flight and yet more than a century after the Wright brothers, our cars are still on the ground. Or, they were. This year, there’s a good chance you’ll be able to take a flying taxi in some cities. What happened? There was a confluence of breakthroughs across a range of unrelated realms, including drone technology, new lightweight materials, and GPS, as well as in batteries, motor design and software.
In January 2025, I think we may be stepping across the threshold into a year where decades will happen in financial regulation, shifting us to a new, high-tech paradigm, worldwide and especially, for reasons I’ll talk about, in the United States. I’m not predicting this as a sure thing. We’re in a moment of incredibly high uncertainty that could take us in wildly different directions. But, that’s one of the reasons that big things may happen. So hear me out.
The new paradigm will transform how we oversee financial markets, converting us to a new tech-based model. We’ll still have the people, but they will be able to achieve vastly better outcomes, because they will be empowered with vastly better information and tools.
The new paradigm – let’s call it Regulation 2.0 – will be differentiated from today by a massive explosion – by orders of magnitude – in access to timely, high quality data and the unprecedented ability to learn from it easily. Regulators will continue to make decisions using their invaluable human expertise, but the humans will have all this expanded information at their fingertips, and will have easy ways to harvest understanding and insight from it. While there is already plenty of technology in financial regulation, this shift will be so huge that it will amount to a difference not of degree, but of kind.
The result will be profoundly better financial regulation, because the new paradigm will take down the top enemy of sound financial oversight, namely, insufficient information. Opacity.
Lest the reader begin to conjure nightmarish visions of regulators morphed into videogame giants wielding terrifying superpowers, fear not. The expanded information, the same new tools, will be in your own hands, as well. They will enable, for everyone, tremendously enhanced understanding about markets and about risks. And, importantly, they will do this at a much lower cost than is possible today. Huge swaths of low-value work will be removed from the daily lives of both regulators and industry and will be left behind. The new superpowers will enable radically improved decision making in every corner and at every strata of the system. Of course, disagreements between regulators and regulatees will remain, always, but they will increasingly center on the substance of the rules rather than on regulatory “burden” and, importantly, they will be argued with the benefit of really good, objective data.
Whether it comes this year or later, Regulation 2.0 is going to make huge dents in the seemingly unsolvable problems that bedevil us in the era of Regulation 1.0. These challenges are stubborn: preventing periodic financial crises, protecting financial consumers and investors, fostering actual financial health for consumers, combating money laundering, fraud and crime, securing privacy, and containing cyber risk. The 2.0 model will go far toward solving the age-old problem of the uneven regulatory playing field between large and small providers, and between banks and nonbank competitors. It will solve most of the rising pain about where to draw the so-called “regulatory perimeter.” It is the best hope we have for maintaining the competitive viability of small financial providers, especially community banks and credit unions (including minority depository institutions (MDIs) and Community Development Financial Institutions (CDFI’s)). It is our best hope, overall, for being able to harness the benefits of innovation in finance, without opening the system to damaging new risks. Globally, it will enable new models of international cooperation on monetary stability and efficiency and in countering rising threats from criminal rings and cyber attacks. And in emerging markets, it will enable continued empowerment of hundreds of millions of consumers and small businesses through inclusion in the formal financial system, while also shielding them from the bad actors that seek to prey upon their vulnerabilities.
I could write a whole book (and, in fact, may do so), on what the new regulatory paradigm will look like and why it will bring profound improvement over what we have today. We at AIR will be exploring it in many ways this year. However, my main goal in this post is to raise an alert about the possibility that 2025 might be a pivot point, a year that carries decades of change. Because if it is, we all need to help shape this future.
This financial regulatory moment contains all the components of the change typologies I noted at the start. We are being acted upon by exogenous shock, and by a long, gradual buildup of change, and, most importantly, by a convergence in these currents.
And we have what may be the triggering mechanism, a potentially mold-shattering wild card, in the second presidency of Donald Trump.
Let’s look at six huge currents of change that are converging as we enter 2025 and that could make this the year of Regulation 2.0.
We begin with the big exogenous shock – the pandemic. Five years ago this month, the world was hit by a once-in-a-century global pandemic that seemed to come out of nowhere and instantly disrupted and reshaped the lives of everyone in the world, all at the same time, all in just a few weeks. And that life disruption lasted, with some waxing and waning, for the better part of two years. People are in fact writing whole books about all the forces set in motion by the COVID-19 pandemic, which include sparking political shifts that almost certainly contributed to the 2024 election of Donald Trump in the United States and the concurrent ousting of incumbent governments worldwide.
In finance specifically, the pandemic pushed both the industry and its regulators into rapid adoption of new technology. For example, bank regulators quickly figured out how to conduct examinations offsite. And banks – even very small ones – quickly figured out how to electronically onboard customers, in general and to bring businesses into the federal Paycheck Protection Program (PPP). Meanwhile, tens of millions of knowledge workers began working from home. Businesses, and families, learned to do Zoom calls, and Zoom and its competitors quickly built up utility and security. These shifts were mirrored (with varying success) in every sphere of our lives, from streaming entertainment to education to telehealth to shopping. Now, three years after “normalcy” returned, the world is far more ripe than it was, for embracing new tech.
Second, a slower but real change is evolving at the regulatory agencies, and is gaining breadth, depth and velocity. We at AIR see it every day – the agencies making changes that were just trickles a few years ago but are now beginning to flow into their systems. The learning and building is mostly hard to see, and importantly, it’s actually too slow to meet the dangers that are gathering. But it is there, and it is producing a rising readiness for change.
Consider this: my colleagues and I founded AIR over five years ago, to advocate for technological modernization of financial regulation. In the first few years, we sometimes felt like a voice in the wilderness. We were arguing that technology is deeply transforming financial services and therefore needs to transform financial regulation, both to equip regulators to understand changing financial markets, and to enable them to harness all this new technology for themselves. At the time, in 2019, you could count on one hand the number of financial regulatory agency heads in the world who had technology change on their short list of priorities.
Today, legions of them do, and more so all the time. The progress is so marked that for 2025, we ourselves have evolved to an ”AIR 2.0” strategy, shifting our priorities beyond advancing awareness of the need for change, to actually shaping what that change needs to be and helping regulators build it. Importantly, the need is much more fundamental than adopting supervisory tech, or suptech. Agencies everywhere – and the financial industry as well – are moving to overhaul their entire technology architecture and, crucially, the human systems surrounding it. As one key example, they are in the process of converting to cloud computing.
A third driver – one that’s reflected in recent agency progress but is bigger – is a growing recognition in the larger ecosystem that if there’s a way to improve regulatory outcomes, we need to do it. Much of this is coming from current and former regulators.
I myself am in this camp. A quick story…last year I was honored to receive a lifetime achievement award from the American College of Consumer Financial Services Lawyers. When someone gives you a lifetime achievement award, it makes you think back over your lifetime and what you’ve been trying to achieve. I’ve been trying, for decades, in both the public and private sectors, to improve people’s financial lives through regulatory measures. That includes serving on the staff of the U.S. Senate, as Deputy Comptroller of the Currency, as a consultant to countless banks and financial firms, and as a senior fellow at Harvard. About twelve years ago, as I watched the digital revolution unfold, I faced the fact that our regulatory measures aren’t achieving those goals. Despite massive money expended by both government and industry, and despite the best efforts of a whole lot of talented and dedicated people – the current system’s results fall far short.
Financial regulation has four broad objectives: maintaining systemic stability and market integrity, protecting consumers, fostering financial inclusion, and combating financial crime and terrorist financing. On the stability goal, the system works most of the time – until it doesn’t. On protection and inclusion, the record is mixed at best. On money laundering and other crime, as listeners have heard me say countless times, our efforts are failing spectacularly. We are actually going from bad to worse, losing ground in that fight.
Furthermore, if our world is becoming more dangerous, as seems likely, how equipped is the global financial system to prevent or recover from cyberattack?
I don’t blame the regulators. With rare exceptions, they are expertly and conscientiously doing their work using the information and tools they have. But, at the quarter mark into a new century defined by technological transformation, they simply should have better tools.
Again, this is increasingly recognized by leaders in and around the financial regulatory world. In their 2022 book Surprised Again! Alex Pollack and Howard Adler examine the market crisis triggered by the COVID-19 pandemic. Examining the 30 official systemic financial risk studies issued in 2019, they found that “not one” even hinted at what lay ahead for financial markets, much less the ensuing boom in prices of stocks, houses and cryptocurrency.
Taking a different lens, former federal regulator Raj Date has argued that today’s process for supervising banks produces suboptimal results at high expense. He writes that for every government bank examiner in the system, the industry:
“…. requires 10-20 bank, consultant, or law firm employees to prepare for, respond to, and remediate examiner findings. The expense of this oversight – and believe me it is incredibly expensive – would surely be worth it if our supervisory efforts were laser-focused on critical risks, provided real-time directives to fix problems, and gave banks a clear understanding of the rules of the road. But that is not the case.”
I’m confident in saying that every financial regulatory body in the world houses a growing cadre of people who want better technology. They exist at every level. They transcend politics and parties. They span all the internal disciplines. The financial industry, too, wants regulatory reform (always). Traditionally, businesses and trade groups have focused more on the content of laws and regulations than on the methods regulators use (perhaps because the latter have seemed unfixable?). Today, though, there is growing recognition that while updating regulatory requirements is necessary, it’s not sufficient. To modernize the financial system, we have to modernize how regulatory work is done.
A fourth driver of change, and another that falls in the category of little-noticed accumulation, is sheer demographics – generational turnover. The era of babyboomer dominance is sunsetting. GenX is a relatively small cohort. Millennials, in contrast, are the largest generation ever to walk the earth, and they are also the first that is digitally-native. The older millennials are now in their forties, stepping into roles of influence and leadership everywhere. Meanwhile GenZ has entered the work force and is making its mark. All of this is inexorably, if mostly invisibly, building rising readiness for tech change in markets and in workplaces of all kinds, including in financial companies, regulatory bodies, and legislatures – everywhere.
The fifth driver is another one that felt exogenous for most of us, arrived with a bang, and is clearly a trigger for wider change. Two years ago, almost overnight, generative AI burst into our lives. Yes, it gets over-hyped. Yes, it has hallucinations. Yes, it poses huge risks. And, yes, AI has been around for 75 years and is already widely used by both financial companies and regulators. Nevertheless, generative AI is the most rapidly adopted new technology in the history of the world. And it is a general technology, meaning that it can solve problems across the whole span of human activity. It’s like electricity, the internal combustion engine, or the semiconductor, spreading everywhere. The fact that it poses dangers is all the more reason to invest heavily, now, in learning how to channel it wisely.
Step back and think about what generative AI does – especially in its first big use case of ChatGPT and Large Language Models (LLMs). These tools ingest vast worlds of unstructured, disorganized information and make it easy, instant, and inexpensive for people to find what they want to know from it, to understand it and put it to use.
Now think about what financial regulators do. They gather information (directly from regulated entities and from the external world), search it to find what they need to know, and try to understand and put it to use. That process, today, is not easy, instant or inexpensive. Just the opposite. And the information accessed is not exactly “vast.” It’s severely limited. It’s often old. Much of it can only be used if it’s already “structured.” All this means that regulators, today, can only see fragments of the financial markets they oversee.
Generative AI will transform how financial oversight is done – for the better, if we do it right.
And other new technologies are converging as well. A key one is tokenization and blockchains. Unlike GenAI, these didn’t explode onto our agendas in a matter of weeks. Instead, they were conceived far away from the daily flow of mainstream finance. Satoshi Nakamoto’s paper was published in 2008, a year after the start of the financial crisis and therefore at a moment when regulators’ attention was completely absorbed elsewhere. For years, blockchain innovation evolved outside the spotlight, gradually catching regulatory attention in the securities and payments worlds, but still at the edge. Many regulators have viewed them as exotic and sometimes inscrutable. Today, I would suggest, these technologies are coming into their moment, in ways that will enable and necessitate substantial regulatory change.
All this leads us to the sixth driver, and it’s the one that could be the trigger that, in the United States, would spark a leap from incremental to transformative change. That driver is the arrival of President Trump.
Obviously, the Trump presidency is an enormous topic, generating endless debate about priorities, plans, methods, style and everything else. But if we zero in on financial regulation, we find a fascinating moment. There’s a real chance that the new administration will bring a big change in people, priorities, pace, and approach to modernizing the model of financial regulation.
Let’s look first at the people. In the coming months, new leaders will take the reins at nearly all the federal financial agencies. More so than in past transitions, this is likely to be an almost full and simultaneous turnover. That, in itself, creates a fresh start that cuts across the silos of U.S. regulatory domains, opening possibilities for aligned and maybe even coordinated change.
Second, also on people, there is a high likelihood that these new leaders will be “tech-forward.” We saw that trait distinctly in the first Trump administration, and it seems likely to be even more pronounced today, given the interim evolution of the drivers of change cited above.
Third, the agencies are entering into a political and policy environment unlike any we have ever seen before. I’ll emphasize two particular factors.
One is the pace of change. So far, the new administration is moving faster than any in memory, at a clip set by the president himself. This spirit of action and urgency could inspire an embrace of acceleration, even at regulatory agencies that traditionally move slowly – especially if I’m right that there is a lot of readiness already in place.
A related factor is that – almost suddenly – the new administration has formed close bonds with America’s tech leaders. Most striking is the relationship between President Trump and Elon Musk, but the pattern is broader. Founders and CEOs who have generally kept low public profiles and/or have long been aligned with Democrat causes and candidates have, in recent months and even weeks, embraced the new President and his plans. This situation is so new and fluid that we can’t know how it may develop, but it is striking. A wild card.
Suddenly, people all over the tech world are talking about regulation, in finance, and overall. If you listen to tech podcasts, as I do, you’ve probably noticed that hosts and guests are – again, almost suddenly – discussing all sorts of regulatory matters. I’ve heard shows where the participants are mispronouncing the names of key financial regulators, seemingly signaling unfamiliarity with them, but are very actively examining what those officials are doing.
The most dramatic development in this vein is the creation of the “Department of Government Efficiency, or DOGE, led by Elon Musk. As someone who has worked with public policy for decades, I have never before seen the topic of government efficiency and effectiveness elevated to the highest levels of national dialogue. Of course, government waste is a perennial political talking point, and we have seen past projects aimed at government-wide cutting of red tape, costs, and burden. However, past initiatives have generally been an “insider” conversation among policymakers and affected industries. Some have produced some progress, at least for a while, but the underlying challenges persist, even when there is political will for reform.
It is too early to know whether DOGE will be different, but it might. One completely unprecedented factor is Elon Musk’s unique positioning in pop culture. Every past effort at government or regulatory reform has seemed, to the average citizen (let’s face it) boring. Elon Musk is not boring. He is the world’s wealthiest person, he owns one of the world’s largest social media platforms, he has a social media following of over 200 million people, and he is collaborating personally with the president of the United States. He has also gotten legions of people interested in DOGE. Suddenly (I’m using that word again) millions of tech people are thinking about problem-solving in areas that, not long ago, were only interesting to a small niche of people who mostly had non-tech skills. What might change, with such a shift in the winds?
This group of reformers have tools that were simply not available to their predecessors. They have breakthrough technology. Technology that can, we know, make complicated things work better, faster, and cheaper, all at once, and can also make them agile and updatable, even as the world continues to change. This has never been possible before.
Obviously many people are troubled by the power the tech sector wields today, shaping our daily lives and our economies, politics, and cultures. It’s not in my scope, here, to weigh in on those complex questions. To me, it’s obvious that tech change can be a force for both good and bad – which is one reason I’m so interested in how it’s regulated.
However, I will say this: better technology, if it is regulated wisely, has the potential to make financial services work better for more people. We need it.
And, even if tech innovators are wrong about some things, they are right when they say that it should be possible to create financial services and systems that leverage new, better technology in a system where regulators deeply understand the tech, are actively interested in its possible benefits for customers and markets, and are making decisions based on sound, plentiful data.
Financial regulation is important. At AIR, we like to say it’s an invisible force in everyone’s lives, all over the world, impacting the opportunities and risks we all encounter, every day, regarding many of the most important things in our lives. This makes the financial regulatory system breathtakingly complex, important, powerful – and entrenched. And those traits, in turn, make it not agile. It does not change easily and, therefore, it does not change quickly.
And yet… it needs to change anyway, and with increasing speed, to keep pace with the headspinning changes emerging in financial markets. I worry all the time that too-slow change will leave this system open to major damage, because we will respond to emerging risks too late, after people are hurt. I worry, every day, that we’re in a race against time.
That is why the prospect that 2025 could bring Regulation 2.0 has my full attention. Clearly, big change may not come (the odds are certainly that it won’t). Things could get worse rather than better. Anything can happen.
Still, we should all think hard about what might be possible, and when, and how to help shape this future. If the incoming Trump regulators were coming into a static situation, they probably couldn’t achieve much change, and especially not sustainable change, because this system has such massive inertia. But, the situation isn’t static. It’s already in motion. The other five currents of change are flowing together. Again, anything is possible.
There is a lot of talk this month about the planets aligning – six are lining up in January, and a seventh will join in February, collectively exerting unusual gravitational pull. Apparently we only get five planets in a row once per century, and all eight line up every 396 billion years.
Back to Lenin – there are decades when nothing changes, and then…who knows?
Here is what I hope will happen in 2025.
I hope you find these Regulation 2.0 observations thought-provoking. At AIR, we’re undertaking a wide range of initiatives, including hosting a lot of dialogue on the podcast show and, if we can pull it off, a conference – a summit – this year on Regulation 2.0. Please join us on the journey.
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