In a recent development, SEC commissioner Hester Peirce put forward an intriguing proposal for a shared digital securities sandbox between the US and the UK on May 29. This proposal aims to expand the existing joint digital securities sandbox (DSS) of the Bank of England and the FCA to include US firms. The idea behind this initiative is to create a collaborative environment where participants can engage in sandbox activities under consistent regulatory conditions in both countries. This article delves deeper into the details of the proposal and analyzes its potential impact on the digital securities landscape.
Under the proposed shared digital securities sandbox, participating firms would have the flexibility to operate under self-selected regulatory conditions while leveraging the sandbox environment to test the market feasibility of their products. The overarching goal is to assess the efficacy of distributed ledger technology (DLT) in facilitating securities issuance, trading, and settlement without triggering any undesirable consequences. By allowing firms to address potential design flaws and operational challenges while serving real customers, the sandbox becomes a critical testing ground for innovation in the securities space.
The SEC’s role in this shared sandbox arrangement involves permitting firms that are not designated as bad actors to participate in the program. However, the commission would also curate a list of eligible activities based on public feedback to ensure that the sandbox operates within defined boundaries. Firms entering the sandbox would be required to adhere to pre-specified activity ceilings and existing anti-fraud regulations while being monitored for compliance with their self-imposed regulatory conditions. The SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) would offer support to firms throughout the participation process, including assistance with no-action letters and exemption orders.
Peirce’s proposal highlights several benefits that can accrue from firms engaging in the shared digital securities sandbox. She notes that companies that participated in the FCA sandbox in the UK between 2016 and 2019 raised more capital and had greater longevity compared to their counterparts. Additionally, consumers stand to benefit from improved access to innovative products that might not be readily available in the market. However, concerns have been raised about the potential anxiety that may arise from firms choosing their regulatory conditions. Peirce addresses this by emphasizing the need for firms to adhere to reasonable conditions set within the sandbox framework.
The introduction of the shared digital securities sandbox proposal comes at a time when the SEC is under heightened scrutiny for its regulatory actions, particularly in the crypto space. Critics have lambasted the SEC, citing various enforcement measures against crypto companies and questioning the agency’s motives in approving certain financial products. Peirce clarifies that her proposal is still a work-in-progress and not an official SEC stance. It represents a response to stakeholders who are keen to participate in the US market under conducive regulatory conditions. Despite the positive reception of Peirce’s Safe Harbor Proposal for token issuers, its progress has stalled since 2021.
The shared digital securities sandbox proposal holds significant promise for fostering innovation and collaboration between US and UK firms in the securities realm. By providing a controlled environment for testing new technologies and business models, the sandbox could pave the way for more efficient and secure securities trading practices. However, careful attention must be paid to regulatory compliance and oversight to ensure that the sandbox operates within established parameters and delivers tangible benefits to all stakeholders involved.