On May 29, SEC commissioner Hester Peirce put forth a groundbreaking proposal for a shared digital securities sandbox between the US and the UK. This innovative idea seeks to extend the Bank of England and FCA’s joint digital securities sandbox to include US firms, fostering collaboration and experimentation in the realm of digital securities. The initiative aims to create a platform where participants can engage in sandbox activities under consistent regulatory conditions in both countries, while also promoting information sharing between the US and the UK.
The proposed digital securities sandbox would provide participating firms with the opportunity to explore and test their products under self-chosen regulatory conditions. By utilizing the sandbox, firms can build a robust market case for their products, address any potential design flaws, and ensure that their offerings meet the needs of real customers. The initiative also seeks to evaluate whether distributed ledger technology (DLT) can effectively facilitate securities issuance, trading, and settlement without adverse consequences.
Under Peirce’s proposal, the SEC would allow any firm not designated as a bad actor to participate in the sandbox, while also establishing a list of eligible activities based on public feedback. Participating firms would be required to adhere to self-stated conditions and disclose their involvement to the public. The SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) would assist firms in the submission of participation notices and provide support with no-action letters and exemption orders. The SEC would also enforce existing anti-fraud regulations and predefined activity ceilings to ensure compliance with the participants’ regulatory conditions.
In response to potential objections, Peirce emphasized the importance of ensuring that firms in the sandbox adhere to reasonable conditions, despite having the flexibility to select their own regulatory framework. She highlighted the benefits observed in the UK, where firms participating in the FCA sandbox raised more capital and exhibited greater longevity compared to other firms. Moreover, regulators overseeing the sandbox expressed majority support for the approach in a 2019 survey. From a public perspective, consumers stand to benefit from enhanced access to innovative products that may not typically be available to them, as firms can swiftly enter the market through the sandbox.
Peirce’s proposal for a shared digital securities sandbox represents a significant departure from traditional regulatory approaches and aims to promote regulatory innovation and collaboration between the US and the UK. As the SEC faces growing criticism under chair Gary Gensler’s leadership, characterized by stringent enforcement actions against crypto companies and alleged political motivations, Peirce’s forward-thinking initiative offers a new perspective on regulatory oversight in the digital securities space. Although her proposal is still a work-in-progress and not an official SEC recommendation, it underscores the importance of engaging with stakeholders and fostering an environment conducive to regulatory evolution.
As the proposal for a shared digital securities sandbox progresses, it will be crucial to monitor its impact on market development, innovation, and regulatory practices in the US and the UK. By creating a platform for firms to experiment with new technologies and regulatory frameworks, the initiative has the potential to drive significant advancements in the digital securities landscape. Peirce’s continued advocacy for regulatory flexibility and innovation through initiatives such as the digital securities sandbox highlights the evolving nature of regulatory oversight in an increasingly digital and interconnected financial ecosystem.