SEC Rebukes “Sandbox” ICO (Initial Coin Offering) Regulation Strategy
SEC Commissioner Hester Peirce spoke at a Medici regulatory conference on May 2nd, giving a lengthy statement on the status of regulatory efforts surrounding Initial Coin Offerings, or ICOs. The statements come in response to an increasingly heated debate about the nature of what constitutes a security.
Specifically, the SEC continues to question the extent to which cryptocurrencies sold on Initial Coin Offering platforms fall under the regulatory authority of the Securities and Exchange Commission.
The highlight of this particular speech is her reluctance concerning sandbox regulations for ICOs. This regulatory approach that emphasizes a two-way dialogue between regulators and entrepreneurs. In many ways, a regulatory sandbox functions as a trial run in which business leaders can try out new solutions and approaches to business without fear of crossing unknown boundaries and invoking the wrath of the SEC.
Peirce was unreceptive to the concept, which has been successfully implemented in the United Kingdom. Surprisingly, her reasoning for not supporting a sandbox approach had less to do with wanting to minimize startup freedom—but wanting to maximize it. Peirce suggested that regulators instead employ a “lifeguard” strategy to regulating these new types of financial entities.
A lifeguard strategy is one in which regulators watch over the financial sector but are less present in the everyday decision-making process as they would be in a sandbox paradigm. It should be acknowledged that Peirce did recognize the relative success of sandboxes for ICOs in the U.K. and the UAE.
These sandboxes are rapidly gaining popularity, too. Lithuania, Malta, and Bermuda are all exploring the idea of sandbox structures for regulating the growing ICO industry. Proponents of this system argue that the increased dialogue between regulator and regulates allows regulators to come to find which strategies of regulation work the best without ruining innovation in a growing sector.
Peirce’s opposition to the system comes primarily from her reluctance to accept a “blanket designation” for all ICOs. By contrast, she argues that the lifeguard model would force regulators to evaluate individual scenarios in order to make case-specific judgements on the best regulatory path to pursue.
This concern reverberates a major regulatory obstacle regarding blockchain-based currencies: they are increasingly hard to define. Currencies are constantly changing, and Peirce herself argues that they will come to look “more and more like securities” as time goes on. Consequently, classifying all currencies as securities or all ICOs as security offerings may be too soon at this time.
Another concern regarding regulation is that classification of all ICOs as security offerings might prematurely stifle innovations that don’t fit within the traditional securities model. If the SEC jumps the gun on classifying all cryptocurrencies as securities or their offerings as securities exchanges, the hands of small startup executives looking to shape up the traditional securities business model may be tied before their plans even come into fruition.
This latest official statement comes as no surprise to those who have been following the cryptocurrency classification debacle this year, but should serve as yet another nod to the ‘wait-and-see’ approach employed by the regulatory authorities of the United States.