SEC Commissioner Hester Peirce issued prepared remarks to the City of London Corporation at Guildhall on July 16, observing how closely UK and US authorities cooperate on enforcement matters.

Her attention turned to cryptocurrency, and Peirce reflected on how she previously suggested a cross-border sandbox between the allies. 

The UK government had proposed a digital securities sandbox, which was limited to UK firms, to generate real-world insights about whether distributed ledger technology could streamline the issuance, trading, and settlement of securities without undermining investor protection, market integrity, or financial stability, she recalled.

“I posited that a cross-border version of the sandbox could be even more effective: innovators could benefit from simultaneously serving UK and US markets; regulators, relying on information-sharing agreements, could benefit by seeing more data on how complex emerging technologies operate in different contexts; and the British and American public could benefit by being served by a greater pool of product and service providers,” Peirce said.

She went on to note that UK Chancellor Rachel Reeves had, in her Mansion House Speech on July 1, advocated exploring opportunities to support industry to innovate cross-border and for potentially allowing greater digital collaboration between capital markets in New York and London, reiterating her support for “proposals for greater digital collaboration between our two financial centers.”

Upon greater reflection, Peirce believes “sandbox” might not fully capture the efficacy of the tool, as the term “evokes for some an isolated laboratory environment with no prospect of long-term commercialization, and for others children at play. Innovators are childlike only in their healthy sense of curiosity, which enables them to identify and solve societal problems.”

Beaches and lifeguards

Beaches are better than sandboxes, Peirce contends. (She has made this point before.)

“Beaches give innovators more room to formulate and reformulate ideas within eyeshot of the regulator – in this analogy the lifeguard – but lifeguards do not opine every time a beachgoer adds a turret to her sandcastle, as a regulator sitting in a sandbox with the innovator might be tempted to do.” 

She thinks we’re stuck with the word “sandbox,” so she outlines what this arena for innovation – whether in cryptocurrency or any other area of concern for regulators – should contain in its parameters.

Exit ramps and equal access

She says the sandbox has limited utility unless it comes with a smooth exit ramp that takes the participant into a workable permanent regulatory environment. Incorporating an effective exit ramp facilitates commercial experiments that lead to better, cheaper products and services and a more resilient and efficient financial market infrastructure.

“Building in cross-border interoperability will be easier now than later when business models have matured.”

Hester Peirce, SEC Commissioner

And she notes how a sandbox with time, customer, or activity limits – absent a nimble mechanism to extend the timeline or raise the limits – could put sand in the gears of a growing company or even bring it to a screeching halt. After a period of slow and steady growth, user interest might spike suddenly. If a regulator were not able to react quickly, the company would have to turn new users away, which could color adversely the public’s perception of the company.

And she highlights equal access, saying everyone should be able to participate on the same terms, but with the understanding that “the whole point of a sandbox is to accommodate experimentation with different ways of doing things.” Transparent terms available to everyone with an option to iterate may address this concern. “A proactive invitation to firms of all shapes, ages, and sizes to come in and talk about whether the sandbox is right for them can help not only to combat perceptions of favoritism, but to build trust, and inform regulators of market developments,” Peirce said.

Eliminate or constrain risk?

Peirce says a cross-border sandbox only makes sense if it streamlines the road to commercial viability for a company that wants to serve both the UK and the US.

Sandbox projects need to be organically generated, not planned by government working groups. “Operationalization of a sandbox may have to wait until a company with a concrete idea for cross-border activity approaches both regulators.”

In terms of protecting investors, Peirce states that new competitors, products, services, and ways of doing things that can come into the market must be a main part of a sandbox, with an eye toward protecting investors along the way.

“A sandbox constrains, but does not eliminate, risk, which is consistent with sound regulation. As Chancellor Reeves noted, regulation can ‘go too far in seeking to eliminate risk,’” Peirce said.

SEC Crypto Task Force

The SEC’s Crypto Task Force that Peirce heads up for the agency has received written comment on the issue of sandboxes, she said.

Pierece said market participants are looking to experiment with bitcoin and other crypto assets, stablecoins, non-fungible tokens, digital identity solutions, collateral management, and tokenization of securities and assets such as real estate, among other issues.

Blockchain allows for increased transparency, enhanced efficiency, lower costs, increased liquidity, and decentralization.

In recent years, many use cases for the technology likely remained unexplored in the face of regulatory hostility or died in the labyrinth of regulatory ambiguity before they could achieve commercial success. The technology and the assets have a borderless nature that would lend themselves well to a mechanism for facilitating experiments and could help to identify where and how existing regulations might need to change in response.

“Because market participants are exploring numerous models, a sandbox for tokenizing securities might make sense. Building in cross-border interoperability will be easier now than later when business models have matured,” she argued.

“I head back to the US today with the hope that the Crypto Task Force can collaborate with the FCA in coordination with our domestic colleagues across the government and in the context of the Administration’s broader cooperation with the United Kingdom.”