SEC Commissioner Hester Peirce has proposed an innovative cross-border sandbox. This sandbox aims to allow firms to conduct the same activities under the same regulations in both the UK and the US. The goal is to experiment with and achieve further market transparency through tokenization.
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Peirce’s proposal builds on the digital securities sandbox (DSS) initiated by the Bank of England and the Financial Conduct Authority (FCA). This DSS seeks to incorporate innovation into the financial system and provide insights into whether distributed ledger technology (DLT) could streamline securities issuance, trading, and settlement without harming investor protection, market integrity, or financial stability.
UK, US Firms Will Conduct Sandbox Activitives Under Same Regulatory Framework
Peirce’s proposal suggests that the DSS should also be open to US-domiciled firms. This would be in addition to a Commission-enacted micro-innovation sandbox and an information-sharing agreement between the UK and US regulators. The idea is to nurture cross-border innovation by allowing firms to experiment with technologies like DLT under the same regulatory conditions in both countries.
The information-sharing agreement between the SEC and UK regulators covering joint sandbox activity would enable both regulators to learn from activity undertaken in both jurisdictions. An information-sharing agreement also would address the concerns about lack of supervision over non-UK firms that led to the proposed exclusion of non-UK firms from the DSS.
Hester Peirce
According to Peirce, the micro-innovation sandbox would enable firms to test new technologies under chosen regulatory requirements in the marketplace. This means that firms participating in the DSS could operate in the US under the same conditions as in the UK. However, their US activities must stay below certain monetary and customer thresholds and comply with general anti-fraud securities laws.
FCA’s Sandbox Has Helped Several Companies
A report noted that firms in the FCA’s sandbox raised 15% more capital and were 50% more likely to raise capital, with a 25% higher chance of surviving years later. This capital-raising effect is most pronounced for smaller and younger firms.
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Firms have used the FCA’s sandbox to understand how regulatory requirements apply to their innovative services or products, speed up the creation of a minimum viable product, and refine their business models using real customer experience.
Sandboxes benefit regulators by creating an environment that helps produce effective and efficient regulations. A 2019 survey found that 73% of sandbox regulators believed implementing a sandbox built their capacity around fintech.
About 85% reported that it helped them assess the appropriateness of their legal or regulatory frameworks. According to Peirce, regulators gain insights into the innovation development process and better understand how emerging products and services might operate in the real world.
Peirce concludes by expressing her enthusiasm for the joint proposal from the Bank of England and the FCA for a digital securities sandbox. She sees it as a commendable commitment to incorporating innovation into the financial system.
Cryptopolitan reporting by Jai Hamid
