SEC's Hester Peirce proposes US-UK crypto regulatory 'cross-border' sandbox

U.S. Securities and Exchange Commission's Hester Peirce proposed a "cross-border sandbox" where the U.S. and the UK would allow crypto firms to perform certain activities under regulators' oversight for two years. 

Peirce proposed the plan in response to the Bank of England and the Financial Conduct Authority's consultation paper on creating a "Digital Securities Sandbox," dubbed DSS. 

"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. This letter outlines one simple approach that our jurisdictions could take to implementing a cross-border sandbox," Peirce said in a statement on Wednesday. 

Peirce, one of two Republican commissioners at the SEC, said her comments were hers and not those of the SEC. The agency is led by Democratic Chair Gary Gensler, as well as two other Democratic commissioners. 

Peirce, who has also been dubbed the nickname "crypto mom," has proposed solutions before on ways to regulate the crypto industry. In 2020, Peirce proposed a three-year "safe harbor period," where innovators are allowed to get blockchain-based digital projects up and running without having to register and follow certain federal securities laws.

The proposal

Under the proposed "micro-innovation sandbox," the SEC would post a list of "eligible activities" after garnering public comments. The agency would also set "monetary ceilings," Peirce said. 

"The goal in setting such ceilings would be to enable participants to achieve sufficient scale to gauge market reaction to their product or service and to identify areas for improvement without compromising investor protection or market integrity," Peirce said. The firms would also be subject to anti-fraud provisions, the commissioner added. 

Firms that take part in the sandbox could participate for two years if they don't exceed "customer limitations" or that monetary cap, Peirce said. 

"During this two-year period, firms would work with the Commission and its staff to secure a no-action letter or exemptive order covering their activities," Peirce proposed. "The Commission staff could extend for a year sandbox eligibility for firms that are actively working on a no-action letter or an exemptive order, but the objective of the micro-innovation sandbox would be to move to more permanent relief within two years." 

Cross border collaboration

By being in the same regulatory sandbox, firms in the U.S. and the UK could work under the same rules, which could, in turn, "foster cross-border innovation," Peirce said. 

"Even though I tend to be more of a beach than a sandbox type of regulator, sandboxes have proven effective in facilitating innovation in highly regulated sectors," Peirce said. "Experience in the UK and elsewhere has shown that sandboxes can help innovators “try out their innovations under real-world conditions.”

The UK's digital securities sandbox was proposed in December as part of the government's Financial Services and Markets Act 2023, or FSMA. After its review period, the bank and FCA plan to post a response to comments submitted. Afterward, the sandbox will be open for applications during the summer of 2024, according to its website.