US should join UK in ‘blockchain sandbox’ free from regulatory interference, says SEC commissioner

Hester Peirce, a ranking member of the Securities and Exchange Commission (SEC), has signaled her support for a proposed cross-border “digital securities sandbox” between the US and the UK

On Wednesday letterSEC Commissioner Peirce praised the Bank of England and the UK Financial Conduct Authority (FCA) for proposing a local “digital securities sandbox” (DSS) that would enable participating companies to experiment with blockchain technology “for the issuance, trading and settlement of securities.”

The sandbox was used as a testing ground to see whether the use of distributed ledger technology could increase 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 should be open to U.S.-based companies,” Peirce wrote. She suggested a “micro-innovation” sandbox in which U.S. companies could test digital commerce activities under a choice of U.S. or U.K. regulations – still subject to general anti-fraud regulations and pre-set monetary and consumer caps.

The SEC and the UK could then share information on activity in 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 from having the space to innovate in “real-world” environments without fear of regulatory crackdown, creating a path for “smaller, disruptive companies” to enter regulated markets and compete with larger incumbents.

“Even though I am a beach rather than a sandbox regulator, sandboxes have proven effective in facilitating innovation in highly regulated sectors,” Peirce wrote. She suggested that a cross-border sandbox could enable experimentation with “asset fractionation” and “interoperability of different blockchains and tokens”, among other things.

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

“I think it’s a good idea, especially since the SEC could learn a lot about regulating the cryptocurrency market by allowing it,” Frye said. “But I’m quite skeptical that Gensler will support it, so it seems unlikely to me.”

“Commissioner Peirce’s cross-border sandbox proposal doesn’t stand a chance in Chairman Gensler’s SEC,” agreed Todd Phillips, an assistant professor of law at Georgia State University. “The SEC would have to approve the sandbox, and given that many view the regulatory sandbox as a backdoor tool for undermining consumer protection regulations, I don’t expect a Democratic SEC majority to bite.”

Regulatory sandboxes are a common tool used in jurisdictions around the world “to provide a dynamic, evidence-based regulatory environment for testing new technologies,” World Bank explain. American FinTech companies took part a dozen or so programs according to the American Banking Association.

Until recently, the Securities and Exchange Commission (SEC) – under the chairmanship of Gary Gensler – carried out dozens of enforcement actions against crypto companies for violating securities laws and refused to heed the industry’s calls for tailored regulations.

Under regulatory pressure, many companies have chosen to flee the United States for fear of non-compliance, while others do so fight against the SEC in court.

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

Shortly thereafter, the SEC quickly made this decision approve spot ETF for public trading despite huge expectations that they would be rejected.

Edited by Ryan Ozawa.