SEC Commissioner Proposes Joint US-UK Digital Securities Sandbox

In a significant move towards fostering cross-border financial innovation, SEC Commissioner Hester Peirce has proposed the creation of a joint US-UK digital securities sandbox. This initiative, presented in response to a consultation paper by the Bank of England and the Financial Conduct Authority (FCA), aims to explore the potential of distributed ledger technology (DLT) in the issuance, trading, and settlement of securities. The proposal underscores the benefits of a collaborative regulatory environment that supports innovation while maintaining market integrity and investor protection.

The proposed digital securities sandbox (DSS) by the UK regulators is designed to assess whether DLT can streamline securities processes, thereby increasing efficiency and reducing the need for intermediaries. This sandbox aims to provide a controlled environment where firms can experiment with emerging technologies under regulatory supervision. Commissioner Peirce’s proposal extends this concept by suggesting the inclusion of US-domiciled firms in the DSS, thus creating a cross-border sandbox that would operate under the same regulatory requirements in both the UK and the US.

Peirce advocates for a micro-innovation sandbox in the US, which would allow firms to conduct specified activities with a degree of regulatory flexibility. These activities would be subject to anti-fraud provisions and predetermined monetary and customer ceilings. The goal is to enable firms to scale their operations and test market reactions without compromising investor protection or market integrity.

Commissioner Peirce highlights several benefits of a cross-border sandbox. Firstly, it would foster innovation by allowing firms to test technologies like DLT in multiple jurisdictions simultaneously. This would help identify and address potential regulatory and operational challenges in a real-world setting. Moreover, the shared regulatory framework would facilitate the collection of more comprehensive data, enabling regulators to develop more effective and efficient regulations.

Peirce notes that sandboxes have proven effective in other highly regulated sectors by providing a safe space for innovation. For instance, firms participating in the UK’s FCA sandbox have raised significantly more capital and are more likely to survive long-term compared to their peers. These firms use the sandbox to understand regulatory requirements, refine their business models, and develop minimum viable products.

A key component of the proposed cross-border sandbox is the establishment of an information-sharing agreement between the SEC and UK regulators. This agreement would enable both regulators to learn from the activities undertaken in each jurisdiction, thereby enhancing their understanding of how emerging technologies operate in different contexts. Such collaboration would also help address concerns about the lack of supervision over non-UK firms, which led to their initial exclusion from the DSS.

The cross-border sandbox would not only benefit firms and regulators but also the broader public by providing access to innovative financial products and services. It would lower entry barriers for smaller, disruptive firms, allowing them to compete with larger incumbents and potentially leading to greater market transparency and efficiency.

While the proposal for a joint US-UK digital securities sandbox is promising, it is not without challenges. Commissioner Peirce acknowledges that her proposal may not be as immediately actionable as other responses to the FCA and Bank of England’s consultation. Implementing a cross-border sandbox would require careful coordination between the SEC and UK regulators to align their regulatory frameworks and ensure consistent oversight.

Moreover, the success of such an initiative would depend on the willingness of both regulatory bodies to embrace innovation and adapt their approaches. The SEC, under its current leadership, has been cautious about regulatory sandboxes, viewing them as potential backdoors for undermining consumer protection laws. However, the recent bipartisan support in the US House of Representatives for legislation providing legal clarity around crypto assets suggests a shifting political landscape that could be more conducive to such collaborative efforts