CFTC Chairman: Crypto and DeFi have outgrown the sandbox

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

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

In a Brookings Institution webcast on crypto regulation on Monday (July 25), Behnam told the policy think tank that he is expanding the regulator’s LabCFTC into a full technology innovation bureau with a director reporting directly to him.

But LabCFTC was as close as the federal government was to a sandbox where innovators in the cryptocurrency and blockchain industries would have more freedom to experiment with financial products and test them live, in an environment of greater oversight from regulators who are more likely to learn and Advice than just threatening enforcement.

Many states have FinTech sandboxes, but the Securities and Exchange Commission (SEC), which has long proclaimed itself the primary US regulator of cryptocurrencies — virtually all digital assets are securities — has long resisted. SEC Commissioner Hester Peirce — known in the industry as “CryptoMom” for her early endorsement — has long called for the agency to create a formal crypto sandbox.

This puts it far behind the UK and EU, both of which have crypto sandboxes. In the UK, the Treasury announced plans in June for a sandbox focused on the distributed ledger technology (DLT) on which blockchains are built. Then there is the Financial Conduct Authority (FCA), which has been working with more than a dozen crypto companies since last year.

See Also: UK Government Pushes Crypto Sandbox, Stablecoin Regulation

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

A safe haven

In February 2020, Peirce proposed a three-year “safe haven” for new cryptocurrencies to evolve to the point where they are definitely no longer securities – meaning their value lies in their usefulness for transactions rather than speculation , something only SEC Chairman Gary Gensler has said applies to Bitcoin.

See Also: Crypto Regulation Weekly: Congress May Challenge SEC Control Attempts Using Ripple Suit

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

Read more: The SEC reckons on the Crypto currency and security conundrum

However, Peirce has long been wary of sandboxes, saying that by bringing innovators and regulators together, she fears “regulators will grab the shovels and buckets” and choke out some of the disruptive project developers they seek to reach.

Go forward

At the same time, the idea of ​​crypto sandboxes is gaining ground both in the US and abroad.

Last October, House Financial Services Committee senior 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 give digital asset projects the legal certainty they need when they launch, McHenry said. This “will allow entrepreneurs to build decentralized networks where a token serves as a medium of exchange or provides access to a function of the network to get the tokens into the hands of other people.”

This is the fundamental point of a sandbox – it offers cryptocurrency developers the opportunity to build blockchains, issue tokens and launch projects that aim to disrupt traditional finance – often by cutting out intermediaries.

A few prime examples of this are cross-border payments company Ripple, which is fighting an SEC lawsuit it says has been accusing it of ongoing, illegal sales of unregistered securities — XRP tokens — since 2013.

Also Read: Crypto Regulation Weekly: Congress May Challenge SEC Control Attempts Using Ripple Suit

Another reason is the $100 million deal the agency and a group of state securities regulators pulled out of crypto lender BlockFi, effectively announcing the SEC that it had a problem with the business model. Though it threatened to sue Coinbase if it launched a similar program some time ahead of schedule — and angered the company by refusing to explain the reasons for its threat.

Read more: SEC’s campaign against crypto lending extends beyond Coinbase

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