Regulation
SEC Commissioner Proposes Sandbox for Digital Securities between US and UK
US Securities and Exchange Commission (SEC) Commissioner Hester Peirce has proposed a joint US-UK “digital securities sandbox”. This joint proposal aims to foster innovation in the use of blockchain technology for securities trading.
This initiative, which builds on the efforts of the Bank of England (BoE) and the Financial Conduct Authority (FCA), provides a secure environment for experimentation while maintaining regulatory standards.
A collaborative sandbox to drive blockchain progress
The sandbox provides a regulated environment for businesses to experiment distributed ledger technology (DLT) in securities trading and settlement. The objective is to explore how DLT can improve efficiency and speed of financial transactions while maintaining investor protection, market integrity and financial stability. However, it is important to note that DSS differs of the Digital Sandbox launched by the FCA in August 2023, which aims to support the development of digital products at an early stage.
The joint consultation paper from the Bank of England and the FCA outlines the Digital Securities Sandbox (DSS) as a key step towards integrating innovative technologies into the financial system. The DSS aims to streamline the issuance, trading and settlement of securities. Despite the promise of DLT, Peirce recognizes limited opportunities to test its applications in the real world.
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“As the consultation rightly notes, “the use of developing technologies, such as DLT, has the potential to change colonization by providing increased speed and efficiency, whilst potentially eliminating the need for intermediaries” , but opportunities to test the technology have been limited. Pierce wrote.
Peirce highlights the transformative potential of a cross-border sandbox. She suggests that this collaboration could produce greater benefits than a single national initiative.
The sandbox would promote cross-border innovation and provide valuable information to regulators by allowing companies to operate under coherent regulatory frameworks in the United States and the United Kingdom. This initiative would also allow companies to test DLT applications within defined regulatory limits and ensure compliance with anti-fraud provisions and other safeguards.
Participating businesses must respect monetary and customer limits and comply with anti-fraud regulations. An information sharing agreement between the SEC and UK regulators would facilitate joint monitoring and learning. It would also address concerns about surveillance of non-UK companies.
Sandboxes have proven effective in promoting innovation in highly regulated industries. Small, disruptive companies have the opportunity to compete with larger incumbents. Data from the FCA sandbox indicates that participating firms are more successful in raising capital, have better survival rates and a better understanding of regulation. These environments also help regulators develop more effective and efficient regulationsgaining insight into how emerging products and services work in practice.
“This capital raising effect is more pronounced for “smaller, younger firms.” Report reveals firms used FCA sandbox to ‘understand how regulatory requirements would apply to their innovative services or products’, carry out testing that could ‘accelerate the creation of a minimum viable product’ or use their experience with real customers to “refine their business model,” Peirce noted.
Additionally, the proposed cross-border sandbox could have a significant impact on financial markets. Innovators could serve the US and UK markets simultaneously. This collaboration would generate extensive data on complex technologies, helping regulators better understand their real-world applications. Furthermore, this initiative could encourage companies to expand their product and service offerings across borders, providing consumers and investors with access to new and innovative financial products.
Specifically, the sandbox could explore the potential of tokenization to improve market transparency, enable asset splitting and achieve operational efficiency. It could also address challenges such as blockchain interoperability, cybersecurity risks, privacy concerns, and fragmentation of asset ownership.
The British Treasury launched consultations on DSS in July 2023. Following the consultation, the government announced its intention to enact legislation relating to this initiative in November.
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Objectives of DSS. Source: bank of england
New regulations were introduced in December, providing the country’s financial regulators with the necessary framework to oversee the sandbox. These regulations came into force on January 8 under the United Kingdom’s Financial Services and Markets Act 2023. Regulators expect the first DSS program applicants to join the sandbox initiative in the fall of this year.
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