- The SEC may introduce a “sandbox” for crypto exchanges to test tokenized securities.
- A time-limited exemptive relief framework could allow innovation in blockchain technology.
- The SEC aims to create a balanced regulatory environment to support growth in the crypto space.
The US Securities and Exchange Commission (SEC) is considering a new strategy to address the issue of regulating crypto exchanges, especially those involved in trading tokenized securities. The new development could mark an opportunity for the sector, especially now that the SEC has proposed the establishment of the “sandbox” framework. This move aims to enhance experimentation within the crypto industry while at the same time fostering innovation in blockchain technology.
What is a Regulatory Sandbox?
A sandbox is an environment in which a company is allowed to conduct business outside the traditional legal requirements. It enables them to experiment with new technologies in a way that does not come with legal consequences. In the case of crypto exchanges, the sandbox of the SEC could offer a test space where firms could explore the ability to trade tokenized securities. These blockchain-based versions are digital assets of traditional securities, such as stocks and bonds.
This initiative has been supported by the SEC’s leadership, including the Acting Chair, Mark Uyeda. Uyeda noted that such a framework could assist crypto companies in operating without restrictions as the SEC tries to develop a more comprehensive set of regulations for crypto assets. Importantly, the sandbox could be available for both registered and unregistered exchanges, which will allow them to test tokenized securities before clear regulatory frameworks are developed.
SEC’s Call for Feedback from the Crypto Community
The SEC has encouraged players in the market to express their ideas on situations that may require exemptions from the law. A “time-limited, conditional exemptive relief framework” could show how crypto exchanges can expand the scope of tokenized securities trading, according to, Acting Chair Uyeda. This would allow for a period of loosening of the rules to enable experimentation and await clarity on long-term regulation.
The move was also intended to alleviate the burden presented to firms caused by the vast and complex state-level licensing structures. Currently, crypto companies need to apply for licenses for each state they operate in. The proposed federal framework would help to tackle this problem by allowing exchanges to get a single license for national operations.
Commissioner Peirce’s Support for Innovation
Hester M. Peirce, who is in charge of the Crypto Task Force, actively promotes the use of sandboxes. She goes further to explain that such a framework could be of immense benefits to the firms since it will enable them to know what needs to work both technically and commercially. According to Peirce, the SEC should consider granting crypto exchanges the freedom to foster new practices for the issuance, trading, and clearing of securities since doing so may help improve its rulemaking practices in the future.
Peirce earlier suggested a ‘digital securities sandbox. This would have enabled US-based crypto firms to engage with their financial market peers in the UK to experiment with new models of securities sales and trading. However, under the leadership of the former chair of the SEC, Gary Gensler, the proposal did not receive much support.
The concept of having a crypto-specific regulatory sandbox is not new. Other governments like those of Colombia have adopted similar measures aimed at stimulating innovation in the market of digital assets. Regulatory sandboxes have also been used in other aspects of the American finance system such as in loan underwriting.
If the SEC decides to go ahead with the sandbox approach, it could mean that crypto exchanges interested in tokenized securities can access the market with ease due to the low hurdles of entry. For instance, platforms like Coinbase would be able to offer more services without the threat of having to abide by rules in every state. This could assist the US in keeping close competition with other nations with respect to the crypto market.
