CFTC’s Chair: Crypto and DeFi Have Outgrown Sandbox

Commodity Futures Trading Commission Chairman Rostin Benham believes that “digital assets and decentralized financial technologies have outgrown their sandboxes.”

This is an interesting comment, given that they haven’t really had any, at least at the federal level. Not that it’s an entirely new thought: He said the same in February.

Speaking on a Brookings Institution webcast about crypto regulation on Monday (July 25), Behnam told the policy think tank that he was upgrading the regulatory agency’s LabCFTC to a full Office of Technology Innovation with a director reporting directly to him.

But LabCFTC was as close as the Federal government has had to a sandbox where innovators in the cryptocurrency and blockchain industry would have more freedom to experiment with and live-test financial products in an environment with greater oversight by regulators who can learn and offer advice rather than simply threatening enforcement.

Plenty of states have FinTech sandboxes, but the Securities and Exchange Commission (SEC), which has long declared itself to be the main U.S. cryptocurrency regulator — saying virtually all digital assets are securities — has long resisted one. SEC Commissioner Hester Peirce — known in the industry as “CryptoMom” for her early support — has long called on the agency to create a formal crypto sandbox.

In this it is well behind both the U.K. and EU, both of which have crypto sandboxes. In Britain, the Finance Ministry in June announced plans for a sandbox focused on distributed ledger technology, or DLT, which is what blockchains are built upon. This will be in addition to the Financial Conduct Authority (FCA), which has been working with more than a dozen crypto companies since last year.

See also: UK Government Pushes for Crypto Sandbox, Stablecoin Regulation

The EU first announced its plans for a crypto and blockchain sandbox back in 2020.

A Safe Harbor

In February 2020, Peirce proposed a three-year “safe harbor” for new cryptocurrencies to develop to the point where they definitely aren’t securities — meaning their value is in their utility for transactions rather than speculation, something SEC Chairman Gary Gensler has only said applies to bitcoin.

See also: Crypto Regulation Weekly: Congress Could Challenge Control SEC Seeks With Ripple Suit

Peirce updated it last April with Token Safe Harbor Proposal 2.0 with several addendums, including the addition of an exit report for companies that had issued cryptocurrency tokens under its auspices providing guidance as to whether it is or is not a security and how to make it sufficiently decentralized to become a non-security.

Read more: SEC Reckons With Crypto’s Currency And Security Conundrum

That said, Peirce has long been wary of sandboxes, saying that by putting innovators and regulators together, she fears “that regulators will grab hold of the shovels and buckets,” and stifle some of the disruption project developers are looking to achieve.

Moving Forward

At the same time, the idea of crypto sandboxes is gaining momentum, both in the U.S. and abroad.

Last October, House Financial Services Committee’s ranking minority member Rep. Patrick McHenry (R-North Carolina), proposed the Clarity for Digital Tokens Act, which he said: “builds on the great work of SEC Commissioner Hester Peirce.”

The bill will provide the necessary legal certainty to digital asset projects when they launch, McHenry said. That “will allow entrepreneurs seeking to build decentralized networks in which a token serves as a means of exchange or provides access to a function of the network to get the tokens into the hands of other people.”

Which is the basic point of a sandbox — providing cryptocurrency developers a way to build blockchains, issue tokens and launch projects aimed at disrupting traditional finance — often by cutting out middlemen.

A couple of prime examples of that are cross-border payments firm Ripple, which is fighting an SEC lawsuit that the company says effectively accuses it of an ongoing, illegal sale of unregistered securities — XRP tokens — since 2013.

Read also: Crypto Regulation Weekly: Congress Could Challenge Control SEC Seeks With Ripple Suit

Another is the $100 million settlement the agency and a group of state securities regulators extracted from crypto lender BlockFi, which was effectively how the SEC announced that it had a problem with the business model. Although it did threaten to sue Coinbase if it started a similar program several earlier as planned — and angered the company by refusing to explain the reasoning behind its threat.

Read more: SEC’s Campaign Against Crypto Lending Grows Beyond Coinbase

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