The proposal would extend the Bank of England and FCA’s joint digital securities sandbox (DSS) — which is set to accept UK applications this summer — to US firms.

Participants could conduct sandbox activities under the same regulatory conditions in both countries, and the US and UK would enter an information-sharing agreement.

Participating firms would conduct activities under self-chosen regulation conditions and use the sandbox to build a market case for their products. They would also be able to address potential design and implementation flaws while serving real customers.

The sandbox would determine whether distributed ledger technology (DLT) can facilitate securities issuance, trading, and settlement without repercussions.

Wide range of participation

The SEC would permit any firm not designated as a bad actor to participate in the sandbox but also create a list of eligible activities based on public input.

The program would generally allow firms to participate for two years.

Participants would need to submit notices of participation and disclose their involvement to the public. The SEC’s Strategic Hub for Innovation and Financial Technology, or FinHub, would help firms submit participation notices and assist with no-action letters and exemption orders.

The SEC would also apply existing anti-fraud authorities and pre-specified activity ceilings while monitoring for compliance with the participants’ self-stated conditions.

Numerous benefits

Peirce’s proposal addressed potential objections, stating:

“While allowing firms to select their own regulatory conditions may cause anxiety in some regulatory quarters … firms would have to adhere to reasonable conditions.”

She outlined numerous benefits, stating that firms that entered the FCA sandbox between 2016 and 2019 in the UK raised more capital and survived longer than other firms. Sandbox regulators also described majority support for the approach on multiple points in a 2019 survey.

As for public benefits, Peirce said that consumers will have access to products that are not usually available to them, as the program will allow firms to enter the market quickly.

The proposed sandbox comes as the SEC faces heavy criticism. Critics have repeatedly slammed the SEC under chair Gary Gensler’s leadership, citing numerous enforcement actions against crypto companies and the agency’s allegedly political motivations to approve spot ETH ETFs.

Peirce emphasized that her permissive proposal is not an SEC proposal but a “work-in-progress” and a response to conversations with parties that want to engage in the US.

Peirce’s Safe Harbor Proposal, which proposes temporary regulatory exemptions for token issuers, has not progressed since its last update in 2021.

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