Regulation by enforcement is beginning to crumble, with a court recently ruling that the SEC’s refusal to issue a crypto rule was unlawful. A new crypto-friendly administration stands ready to create crypto clarity through new appointments at the SEC and the CFTC.
New acting CFTC Chair Caroline Pham has proposed an uncommon approach, namely the regulatory sandbox.
A regulatory sandbox is a waiver of regulations but in a supervised environment. Projects can test innovative ideas outside rigid regulatory frameworks. Federal digital asset sandboxes may come sooner than you think, but current state sandbox models fall short in the digital assets context, with extremely limited scopes and durations.
We propose a “Sustainable Sandbox” and develop Pham’s idea, along with similar proposals from SEC Commissioner Peirce, and various initiatives in states and the Federal Reserve.
The Sustainable Sandbox will give regulators enough time and information to draft thoughtful and sensible rules governing digital assets. Without such a stopgap, the digital assets industry would end up in the same place–trying to work with rules that do not make sense.
How sandboxes work
At its core, a regulatory sandbox allows businesses to conduct live experiments with innovative technologies while regulators observe and gather data. Businesses apply for waivers from certain laws that may technically apply to their activities but do not align with the unique nature of their innovations.
For example, a decentralized finance (DeFi) platform might be exempted from securities regulations that were designed for traditional financial intermediaries. This exemption provides the freedom to innovate without being hamstrung by outdated rules.
Importantly, regulatory sandboxes do not equate to a regulatory free-for-all. Participants must adhere to baseline standards for consumer protection and financial stability, ensuring that accountability is not sacrificed in the name of innovat
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Author: Joshua Durham, Jessica Furr
