What regulators can learn from the aftermath of the Titanic
On the morning of July 24, 1915, passengers were boarding the SS Eastland when the ship keeled over in the Chicago River. The passengers — many of them immigrants from Europe — were trapped inside the hull. More than 844 souls perished.
The cause? Bad regulation.
After the RMS Titanic sank in 1914, policymakers scrambled to update maritime safety laws to protect passengers. Famously, the Titanic only had enough lifeboats for about a third of her passengers, which became an obvious focus for policy makers. The result was the signing of the Convention for the Safety of Life at Sea (SOLAS) and the 1915 Seamen’s Act, which stipulated that ships now had to carry lifeboats and rafts based on the number of persons on the ship and not — as before — on tonnage. The implementation of the Seaman’s Act meant passenger ship operators could increase a ship’s capacity by increasing the number of new or retrofitted lifeboats on it.
For the operator of the SS Eastland, this meant adding lifeboats, rafts, and davits to comply with the SOLAS Convention. Their reasoning? With additional safety devices, they could increase the ship’s capacity and increase their profit — quite the opposite of the regulators’ intention, but in line with the incentives they had created. Without those additions and the subsequent increase in passenger capacity, the ship would not have foundered. Ironically, the effort to prevent another Titanic ended up causing one.
The tragedy of the SS Eastland was an outcome of prescriptive regulation and the unintended consequences of its corresponding incentives. An effort that began with the best of intentions to protect passengers mutated into a way to increase passenger occupancy.
Policy makers had other paths available. They might have required, for example, that maritime organizations take “all reasonable precautions” to ensure passenger safety, and then allow operators to determine how best to implement that principle — in conjunction, of course, with regulator oversight. Such a principles-based approach would have aligned incentives on outcomes, not on inputs. It would have required flexibility for the industry, who both would have benefitted from protecting their passengers and who might have had creative ideas about how to do so. It also would have required oversight from regulators, who would have had to learn about a company’s unique operations or products, review bespoke and calibrated approaches, and confront new proposed solutions they may have otherwise ignored.
Passengers would have been safer, the industry would have created and shared innovative solutions, and operators would have had clear, outcomes-based guidelines to guide their behavior.
More than a hundred years later, regulators continue to repeat this mistake by passing rules that attempt to prevent any potential or imagined negative outcome through prescriptive “solutions.” This prescriptive approach, except when unavoidable in rare circumstances, cannot and will not work. A better approach, today as much as in 1915, is a principles-based one.
A principles-based approach is especially important with emerging technology, which evolves so rapidly, and is often so complex, that regulators cannot hope to prescribe their way to success. Instead, a principles-based approach can best help regulators achieve their goals in quickly changing, dynamic spaces.
A prime case study is the U.S.’s approach to crypto regulation. In the absence of clear rules of the road, some agencies have still taken their legacy prescriptive rules written for traditional, centralized actors and applied them to, and enforced them against, web3 without regard for the results. Innovative web3 companies are now faced with the choices of “comply or die” or “dying by complying.” Call it “regulation by intimidation.” Never have I witnessed a more stark example of regulation-by-intimidation than the Securities and Exchange Commission’s current posture toward crypto, which is putting American innovation at risk.
A principles-based model isn’t theoretical. In my more than 4 years as a Commissioner at the U.S. Commodity Futures Trading Commission, I saw firsthand the benefits of a principles-based regulatory framework. The CFTC’s enabling statute, the Commodity Exchange Act, requires that many of the agency’s primary rules be principles-based rather than prescriptive. Its emphasis on outcomes-focused regulation encourages CFTC regulated entities to satisfy “core principles” in a manner tailored to their specific operations. The result is an adaptive set of regulatory solutions that firms explore under the close observation by, and in partnership with, regulators to ensure the agency’s full understanding of evolving market structure and a business’s scope, operations, risk, and regulatory outcomes. One could think of this as “regulation by conversation.”
What could other regulators and governments learn from this approach when considering regulatory models for crypto? A principles-based regulation-by-conversation model would present strong benefits for responsible innovation by opening a transparent, productive dialogue between web3 entrepreneurs and regulators. The goals would be to determine how best to realize the technology’s benefits, understand how legacy risks may be solved by the technology, and explore innovative solutions to new risks. This dialogue enables a principles-based regulatory framework to better achieve policy outcomes like protecting consumers without negative unintended consequences or incentives, while also providing clarity for this nascent but essential innovation.
Like the SS Eastland, the potential of web3 will capsize under overly prescriptive rules originally designed to address legacy centralization risks, creating perverse incentives, and undermining the core benefit of the technology. Instead, this technology requires principles-based policy that targets businesses, not open-source protocols or models. The consequence of avoiding productive conversations with the industry will destroy crypto’s revolutionary potential.
If regulators continue to rule by fiat, the industry will struggle to thrive in the U.S. and will move to other, more appropriately calibrated jurisdictions. Ultimately, the burden of their mistakes will land on the public, undermining U.S. leadership, imperiling national security, decelerating growth, and eroding individual freedoms.
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Brian Quintenz is the Global Head of Policy for a16z crypto, and a former commissioner of the Commodity Futures Trading Commission (CFTC). You can follow him on X @brianquintenz and Farcaster @brianquintenz
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