US Should Join UK in ‘Blockchain Sandbox’ Free of Regulatory Meddling, SEC Commissioner Says

Hester Peirce, a leading member of the Securities and Exchange Commission (SEC), has signaled her support to a proposed cross-border “digital securities sandbox” between the U.S. and the U.K.

In a Wednesday letter, SEC Commissioner Peirce praised the Bank of England and the Financial Conduct Authority (FCA) of the U.K. for proposing a local “digital securities sandbox” (DSS), which would let participating companies to experiment with blockchain technology “in the issuance, trading, and settlement of securities.”

The sandbox was pitched as a testing ground to see whether using distributed ledger technology can boost the efficiency of the traditional banking system—and the commissioner said it should be available to companies on both sides of the Atlantic.

“I suggest that, contrary to the proposal, the DSS be open to US-domiciled firms,” wrote Peirce. She suggested a “micro-innovation” sandbox where American firms could test digital trading activity under their choice of either U.S. or U.K. regulations—still subject to general anti-fraud provisions and predetermined monetary and customer ceilings.

The SEC and U.K. could then share information about activity within both sandboxes, and use their findings to develop better regulations for their local crypto sectors, Hester said.

Meanwhile, she wrote, the private market would benefit by having a space to innovate in “real-world” environments without fearing a regulatory crackdown, creating a path for “smaller, disruptive firms” to enter regulated markets and compete against larger incumbents.

“Even though I tend to be more of a beach than a sandbox type of regulator, sandboxes have proven effective in facilitating innovation in highly regulated sectors,” Peirce wrote. A cross-border sandbox, she suggested, could allow experimentation with “fractionalization of assets” and “interoperability across different blockchains and tokens,” among other things.

While the proposal is an interesting one, it’s unlikely to go anywhere given the current leadership of the SEC, University of Kentucky paw professor Bryan L. Frye told Decrypt.

“I think it’s a good idea, especially because the SEC could learn a lot about regulating the crypto market by allowing it,” Frye said. “However, I’m pretty skeptical that Gensler will support it and so it strikes me as unlikely to happen.”

“Commissioner Peirce’s cross-border sandbox proposal has no chance in Chairman Gensler’s SEC,” concurred Todd Phillips, assistant law professor at Georgia State University. “The SEC would have to approve the sandbox, and given that many consider regulatory sandboxes to be backdoor means of undermining consumer protection laws, I don’t expect the Democratic SEC majority to bite.”

Regulatory sandboxes are a common tool employed among jurisdictions around the world “as a means of providing a dynamic, evidence-based regulatory environment to test emerging technologies,” the World Bank explains. U.S. FinTech companies have participated in over a dozen programs at the state level, according to the American Banking Association.

Until recently, the Securities and Exchange Commission (SEC)—under chairman Gary Gensler—has led dozens of enforcement actions against crypto firms for violating securities laws, and refused to heed industry calls for tailored rulemaking. 

Under regulatory pressure, numerous firms have opted to flee the United States for fear of non-compliance, while others are fighting back against the SEC in court. 

Earlier this month, political winds turned in crypto’s direction after the House of Representatives passed legislation to provide legal clarity around crypto assets with strong bipartisan support.

Shortly afterward, the SEC rapidly decided to approve Ether spot ETFs for public trading, despite overwhelming expectations that they would be denied. 

Edited by Ryan Ozawa.

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