In a bold move to foster innovation and collaboration in the digital securities realm, SEC commissioner Hester Peirce put forward a groundbreaking proposal on May 29. The proposal suggests the establishment of a shared digital securities sandbox between the United States and the United Kingdom. This sandbox would build upon the existing joint digital securities sandbox (DSS) led by the Bank of England and FCA. The objective is to create a platform where US firms can join UK counterparts in testing new ideas and technologies under a unified regulatory framework.
Under Peirce’s proposal, participating firms would have the unique opportunity to engage in sandbox activities while operating under self-selected regulatory conditions. This flexibility would allow them to test their products in a controlled environment, address potential design flaws, and gather valuable insights from real customers. The sandbox would specifically focus on exploring the potential of distributed ledger technology (DLT) in facilitating securities issuance, trading, and settlement processes without adverse consequences.
Moreover, the SEC would designate a list of eligible activities based on public input to ensure the integrity and safety of the sandbox. Firms deemed not to be bad actors by the SEC would have the chance to participate in the program for a two-year period. To enhance transparency, participants would be required to submit notices of participation and disclose their involvement to the public.
Peirce’s proposal emphasizes the significant benefits that such a digital securities sandbox could bring to both firms and consumers. Drawing from the success of the UK’s FCA sandbox, which witnessed increased capital raising and prolonged survival rates among participating firms, the proposed transatlantic sandbox aims to create a conducive environment for innovation and growth. Consumers, in turn, stand to benefit from expedited market entry of new products that may not have been readily available to them before.
Furthermore, results from a 2019 survey indicated strong support from sandbox regulators for the approach, indicating a high level of confidence in the potential of the sandbox model to drive positive outcomes in the digital securities space.
Peirce’s proposal comes at a critical juncture for the SEC, which has faced scrutiny for its enforcement actions against crypto companies and alleged political motivations in approving certain financial products. However, Peirce clarifies that her proposal is a “work-in-progress” and not an official SEC mandate. It is a response to ongoing conversations with industry stakeholders who are eager to explore opportunities in the US market.
Peirce’s Safe Harbor Proposal, which seeks temporary regulatory exemptions for token issuers, has yet to make significant progress since its last update in 2021. Nevertheless, the introduction of the shared digital securities sandbox signifies a step in the right direction towards fostering innovation, collaboration, and regulatory clarity in the digital securities landscape.
The proposed transatlantic digital securities sandbox has the potential to revolutionize how securities are issued, traded, and settled in a digital age. By providing a structured environment for experimentation and learning, the sandbox could pave the way for greater innovation, consumer access to new products, and regulatory harmonization between the US and the UK. As the digital securities market continues to evolve, initiatives like this sandbox play a crucial role in shaping its future trajectory.
