In a “To Whom It May Concern” statement published late last week, SEC Commissioner Hester Peirce tipped her hat at the recent joint proposal from the Bank of England and the FCA for a digital securities sandbox (DSS).

She said the proposed sandbox initiative “reflects a commendable commitment to incorporating innovation into the financial system.” And she added: “I write to make the case for a cross-border sandbox between our respective jurisdictions, which would build on the promise of the DSS and serve our investors, market participants, and regulators.”

She notes that her views are strictly her own and do not reflect the views of the US government, SEC or of her fellow commissioners.

The UK regulators’ proposed sandbox

The sandbox proposed by the two UK authorities has been designed to generate real-world insights about whether distributed ledger technology (DLT) could streamline the issuance, trading, and settlement of securities without undermining investor protection, market integrity, or financial stability.

As the consultation notes, “use of developing technology, such as DLT, has the potential to change settlement by offering increased speed and efficiency, while potentially removing the need for intermediaries,” but opportunities for testing the technology have been limited.

The DSS framework will allow participants access to a modified regulatory framework for testing and scaling of their activities via Financial Management Information Systems (FMIs).

With the DSS, the Treasury has set three general aims of the initiative:

1. Test how current UK legislation needs to change in order to comply with digital asset technology and the new practices associated with it;
2. Enable testing and adopting digital asset technology in FMIs; and
3. Test the use of FMI sandboxes as a policymaking concept.

Contours of a joint sandbox

Commissioner Peirce’s proposed cross-border sandbox would allow firms to conduct the same sandbox activities under the same regulatory requirements in both the UK and US. (Under the current proposal, the DSS is not open to US-domiciled firms.)

“Together with a Commission-enacted micro-innovation sandbox and an information sharing agreement between our two jurisdictions, the expanded eligibility would foster cross-border innovation. The SEC’s micro-innovation sandbox would allow firms to experiment in the marketplace with specified technologies – such as using DLT to issue, trade, and settle securities – under their choice of regulatory requirements,” she said.

“Participation candidates might be solutions to tokenization hurdles, including the lack of interoperability across different blockchains and tokens.”

Commissioner Hester Peirce

Thus, firms participating in the DSS could choose to operate in the US under the same regulatory conditions as those they follow in the UK, except the firms’ US activities would have to stay below predetermined monetary and customer ceilings and would be subject to the general anti-fraud provisions of the securities laws.

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, she said. And an information-sharing agreement 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, she adds.

Potential benefits

Among the many potential benefits she foresees with such a cross-border sandbox, Peirce says it would allow US and UK innovators to benefit from simultaneously serving markets in two jurisdictions. It also would benefit regulators by producing more data on how complex emerging technologies operate in different contexts than would be possible with a single jurisdiction sandbox.

A cross-border sandbox also could benefit the British and American public as it could prompt firms domiciled in one jurisdiction to expand their product and service offerings to the other, she said.

“Participation candidates might be solutions to tokenization hurdles, including the lack of interoperability across different blockchains and tokens, cybersecurity risk, privacy concerns, the fragmentation of asset ownership, and any unique challenges arising from the cross-border nature of blockchains,” she said.

Crypto Mom

Commissioner Peirce, dubbed “Crypto Mom” by many of the crypto fans who appreciate her views on cryptocurrency, sees great promise in digital assets and blockchain technology and thinks experimenting with new technologies, products, and services is a wise idea for investors and the financial markets more generally.

Peirce concludes her statement and cross-border sandbox proposal by listing many of the elements of the proposed micro-innovation sandbox (such as eligibility criteria, duration, disclosure, fraud prevention oversight …) and inviting responses to her and her team directly.