The regulation by the application is beginning to crumble, and a court recently ruled that the refusal of the SEC to issue a cryptographic rule was illegal. A new friendly administration with cryptocurrencies is ready to create cryptographic clarity through new appointments in the SEC and CFTC.
The new acting CFTC president, Caroline Pham, has proposed an unusual approach, namely the regulatory sand box.
A regulatory sand box is a resignation to regulations but in a supervised environment. Projects can try innovative ideas outside the rigid regulatory frameworks. Federal digital asset sandboxes may appear before what he thinks, but current state sandbox models fall short in the context of digital assets, with extremely limited areas and durations.
We propose a “sustainable sand box” and develop the idea of Pham, along with similar proposals of the SEC Peirce Commissioner, and several initiatives in the states and the Federal Reserve.
The sustainable sandbox will give regulators enough time and information to write reflexive and sensible rules that govern digital assets. Without such a stop, the digital asset industry would end in the same place, trying to work with rules that make no sense.
How sandboxes work
In essence, a regulatory sand box allows companies to perform live experiments with innovative technologies while regulators observe and collect data. Companies request exemptions from certain laws that can technically apply to their activities but do not align with the unique nature of their innovations.
For example, a decentralized finance platform (DEFI) could be exempt from the regulations of securities that were designed for traditional financial intermediaries. This exemption provides the freedom to innovate without being hindered by obsolete rules.
It is important to highlight that regulatory sandboxes do not equal a free regulatory for all. Participants must comply with basal standards for consumer protection and financial stability, which guarantees that responsibility is not sacrificed in the name of innovation.
In practice, regulatory sandboxes have proven to be valuable tools to identify obsolete regulations. When generating real world data, they allow legislators to evaluate whether certain rules must be reform or repealed. Without such mechanisms, unnecessary or little practical regulations run the risk of suffocating progress and innovation.
United Kingdom Lessons and beyond
The United Kingdom has been a pioneer in the implementation of regulatory sandboxes. The Financial Behavior Authority (FCA) introduced its sandbox in 2016, offering a structured environment for companies to prove new ideas. Participants have varied from large law firms to cryptocurrency projects, which reflects the inclusion and flexibility of Sandbox.
In terms of innovation of digital assets, the success of the United Kingdom can be attributed to its focus on promoting both collaboration and innovation. By allowing companies to experience within a regulated framework, Sandbox has attracted a diverse variety of participants and has provided critical information on how emerging technologies interact with existing laws.
Other regions, such as Singapore and the United Arab Emirates, have also adopted sandboxes as tools to boost innovation. Singapore’s monetary authority (MAS) has used its sandbox to advance tokenization in financial services, while EAU have taken advantage of their frame to attract new Blockchain companies. These examples highlight the potential of sandboxes to position countries as global leaders in the digital asset space.
Challenges faced by regulatory sandboxes
Despite its benefits, existing regulatory sandboxes face several limitations:
- Narrow reach: Most sandboxes are restricted to specific industries or activities, which limits its applicability to broader regulatory challenges. Participants must also request and be accepted, so not all projects are treated equally.
- Short duration: Sand boxes often have fixed deadlines, which requires companies to leave the program without long -term regulatory clarity.
- High costs: Participating in a sandbox can be intensive in resources for both companies and regulators, which dissuade the smallest players of the application.
To address these challenges, we propose the “sustainable sandbox”: a redesigned frame adapted to the unique needs of the cryptographic industry.
Sustainable ‘sandbox design’
The “sustainable sandbox” is based on the strengths of existing models while adding their deficiencies. This is how it would work:
1. Simplified automatic registration
Participants who complete a form presentation process will register automatically and will not be subject to a application and acceptance process by the regulator. Companies that do not conform to the default form, such as decay or decentralized exchanges, could propose their own compliance frameworks (subject to regulatory approval) aligned with the broad policy objectives established by regulators.
2. Decision making based on data
The regulators would collect and analyze the data of the Sandbox participants to evaluate the effectiveness of the renounced regulations. This information could report broader reforms, creating a feedback cycle that aligns regulation with innovation and allows regulators to write new sensible rules.
3. Transitions without problems
At the end of the Sandbox period, the participants could make the transition to a safe port (which the SEC Hester Peirce commissioner has imagined for a long time) or receiving letters without action (but continuing to subject to supervision of the light), providing long -term regulatory clarity. This ensures that companies do not face a regulatory cliff, which could interrupt operations and deter participation.
Why now?
The need for a “sustainable sand box” in the United States has never been greater. Innovative industries such as Blockchain and AI are rapidly evolving, but outdated legal frameworks threaten to suffocate their potential. At the same time, many regulators lack a deep understanding of these technologies, which makes it difficult to create effective rules. By establishing broad political objectives and collaborating with the interested parties of the industry, regulators can close this knowledge gap and create a more adaptive legal framework.
The recent decision of the Supreme Court in Loper Bright Enterprises v. Raimondo More underlines the urgency of regulatory innovation. By eliminating the deference of the courts to the interpretations of the agency of their authority, the ruling changes power towards the regulated industries, emphasizing the need for greater collaborative governance. The “sustainable Sandedbox” offers a way forward, balancing the needs of regulators and innovatives in a landscape that changes rapidly.
Final thoughts
As the cryptographic industry continues to grow, so does the need for regulatory frameworks that can follow the rhythm of innovation. Sustainable “Sandedbox” provides a plan to balance experimentation with responsibility, promoting a collaborative environment where both regulators and companies can prosper. By adopting this model, the United States has the opportunity to lead the world in cryptographic innovation while guaranteeing consumer protection and market stability.
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