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United States Securities and Exchange Commission (SEC) Commissioner Hester Peirce has proposed a plan for a “cross-border” digital asset regulatory sandbox to combine with the United Kingdom’s “Digital Securities Sandbox,” currently being consulted on by the Bank of England (BoE) and Financial Conduct Authority (FCA).
Last week, SEC Commissioner Peirce proposed the U.S.-U.K. “cross-border sandbox,” which would allow digital asset firms to operate under regulatory oversight but outside of the standard legal framework for two years.
Peirce proposed the plan in response to an April BoE and FCA consultation paper on creating a Digital Securities Sandbox (DSS).
Under current proposals, the DSS is open to U.K. firms only and will modify regulations in the U.K. to enable financial market participants to use new technology—such as Distributed Ledger Technology (DLT)—in the trading and settlement of digital securities such as shares and bonds.
It aims to create a controlled environment, allowing companies and authorities to test new technology in financial markets, overcoming existing regulatory obstacles, and fostering innovation in the digital asset industry.
“I write to make the case for a cross-border sandbox between our respective jurisdictions, which would build on the promise of the DSS and serve our investors, market participants, and regulators,” said Peirce in a May 29 statement.
“The proposed cross-border sandbox would allow firms to conduct the same sandbox activities under the same regulatory requirements in both the United Kingdom and the United States. I suggest that, contrary to the proposal, the DSS be open to U.S.-domiciled firms.”
Peirce is one of two Republican commissioners at the SEC and was keen to emphasize that her comments were her own and not those of the SEC.
Peirce is known as one of the more digital asset “friendly” commissioners at the regulator, in contrast to SEC Chair Gary Gensler, who has made no secret that he sees the industry as “rife with fraud, abuse, and misconduct.” Peirce, who has also been dubbed the “crypto mom,” has previously proposed other initiatives that would favor innovation over increased oversight, such as a three-year “safe harbor” period for blockchain-based digital projects to get up and running without having to register and follow certain federal securities laws.
Under Peirce’s latest proposal, the “micro-innovation sandbox,” the SEC would post a list of “eligible activities” after garnering public comments.
“The sandbox is designed to generate real-world insights about whether distributed ledger technology (DLT) could streamline the issuance, trading, and settlement of securities without undermining investor protection, market integrity, or financial stability,” said Peirce. She added that firms would also be subject to anti-fraud provisions and the regulator would set “monetary ceilings.”
“The goal in setting such ceilings would be to enable participants to achieve sufficient scale to gauge market reaction to their product or service and to identify areas for improvement without compromising investor protection or market integrity,” he added.
Firms participating in the proposed sandbox could join for two years if they don’t exceed “customer limitations” or the monetary cap.
“During this two-year period, firms would work with the Commission and its staff to secure a no-action letter or exemptive order covering their activities,” said Peirce. “The Commission staff could extend for a year sandbox eligibility for firms that are actively working on a no-action letter or an exemptive order, but the objective of the micro-innovation sandbox would be to move to more permanent relief within two years.”
By being in the same regulatory sandbox, firms in the U.S. and the U.K. would work under the same rules, which Peirce hopes would foster increased cross-border innovation.
“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,” said Peirce. “Experience in the U.K. and elsewhere has shown that sandboxes can help innovators’ try out their innovations under real-world conditions.'”
Concluding her comments, Peirce acknowledged that her proposal “may not be as immediately actionable” as other responses to the U.K.’s DSS consultation request. However, she added that the FCA and BoE consultation “offers a timely opportunity to discuss greater cross-border collaboration in facilitating innovation.”
The UK’s Digital Securities Sandbox
The U.K. Treasury began consulting on the framework for the DSS in July 2023, setting out how institutions could apply to establish and operate digital securities depositories and/or trading venues under a modified temporary legislative framework.
This consultation ended on August 22, 2023, after which the U.K. Chancellor of the Exchequer, Jeremy Hunt, outlined plans for the DSS in his Autumn budget statement, stating that he hoped it would facilitate the expansion of the digital assets sector in the country.
“The government will lay a statutory instrument to implement the Digital Securities Sandbox, delivering on the Edinburgh Reform announcement to implement a Financial Market Infrastructure Sandbox in 2023,” according to the budget.
In December 2023, the government introduced a new regulation that provided the FCA with rules for supervising the DSS for tokenized securities, with the Sandbox subsequently coming into effect on January 8, 2024.
In April, the BOE and FCA announced they were consulting on their proposed approach to operating the DSS, with a tentative timeline of Autumn 2024 for the first cohort of DSS applicants to become sandbox entrants.
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