Commodity Futures Trading Commission (CFTC) commissioner Caroline Pham has called for the creation of a US regulatory sandbox for digital assets.
Pham is one of five commissioners at the CFTC, the independent federal regulatory agency that oversees US derivatives markets, and made the proposal in a speech at a conference organised by Washington DC-headquartered libertarian think-tank the Cato Institute.
A sandbox is a testing-ground for regulators to assess innovative private-sector propositions and projects in a controlled environment.
“As a regulator overseeing the largest financial markets in the world, we have a responsibility to proactively take on new challenges instead of passive observation,” Pham told the audience in a pre-recorded speech titled ‘New Regulatory Sandboxes: A Proposal for a CFTC Pilot Program’. “That’s why I’m recommending a time-limited CFTC pilot programme to support the development of compliant digital asset markets and tokenisation.”
Pham’s speech, which she said did not necessarily represent the views of the CFTC or colleagues, was delivered as US authorities and politicians thrash out how to regulate crypto-assets. The CFTC and Securities and Exchange Commission (SEC) were last year encouraged by the White House to ‘aggressively pursue investigations and enforcement actions’ against unlawful practices in the digital assets space’ but the journey towards the creation of a regulatory framework remains bumpy and politically divisive.
RELATED ARTICLE European Parliament backs crypto rules to put EU ‘at forefront of token economy’ – a news story (25 April 2023) on European parliamentarians voting overwhelmingly to approve the high-profile Markets in Crypto Assets (MiCA) regulation, making the European Union the world’s first major jurisdiction to establish a comprehensive regulatory framework for crypto-assets
Regulatory clarity required
Pham began her speech at the 7 September ‘Staying Ahead of the Curve: Crypto Regulation and Competitiveness’ event by praising “approaches to technology and responsible innovation” outside the US. She warned that a “wait-and-see approach in the US towards the potential opportunities of blockchain technology and digital assets falls short of the proactive measures needed in this rapidly evolving industry.”
“That is why I have consistently called for the CFTC to use our existing authority to provide regulatory clarity for digital assets to ensure that robust guardrails are in place,” she said in her 13-minute speech, listing past calls she has made for US authorities to agree a comprehensive regulatory framework.
“Today, I will propose that the CFTC launch the first-ever US pilot programme for digital asset markets,” she continued. “Our principles-based framework is built for innovation in technology, new products, and market structure. In waiting and seeing, we’re missing opportunities to capitalise on all the benefits of the technology before us, while others take a more strategic and long-term view. The US may soon find ourselves constantly playing catch-up, unable to effectively leverage this technology for economic growth.”
“Jurisdictions all around the world have embraced the drive to stay ahead of the curve and launched innovation facilitators or ‘regulatory sandboxes’,” she said. “In the US, the federal regulatory framework raises challenging legal issues – including the fact that the CFTC is an enforcement agency – for agencies like ours and the SEC to structure and design regulatory sandboxes. While US federal agencies have created offices dedicated to fintech, true regulatory sandboxes have been limited to the states.”
“It’s time to take action…”: Pham promoted her speech using ‘X’ (formerly known as Twitter)
Pilot programmes pedigree
Pham said that the CFTC and SEC “have in the past had success launching pilot programmes”, which she described as “provid[ing] a way to strategically introduce and refine new initiatives.”
“Like regulatory sandboxes, pilot programmes can be an effective tool to meaningfully facilitate innovation,” she said, providing some examples.
Moving on to her proposal of a ‘time-limited CFTC pilot program to support the development of compliant digital asset markets and tokenisation’, she said that “in line with our previous pilot initiatives, I am optimistic that this approach will ensure the integrity of our markets and impartial access, foster liquidity and competition, address potential conflicts and risks, and prevent fraud, abusive practices and manipulation.”
She went on to propose that “as a first step”, the CFTC should “call for a roundtable to engage all stakeholders”.
“We can leverage the work of the CFTC GMAC [Global Markets Advisory Committee] Digital Asset Markets Subcommittee to provide key insights on the design of a successful pilot programme, as well as the work of other CFTC advisory committees. After that, the CFTC should propose and adopt rules establishing a pilot programme for a specific period of time that incorporates many of the components drawn from past pilot programs”, she said, adding that the CFTC should – after any pilot were to conclude – “examine the data gathered… and consider whether there should be a permanent change to our rules.”
RELATED ARTICLE Sandboxes could ‘amplify problems’: IMF analysis questions many test-spaces’ impact – our news story (11 September 2023) on a 58-page paper co-authored by IMF financial sector expert (fintech) Parma Bains and research analyst Caroline Wu
Sandboxes’ popularity surging
The UK’s Financial Conduct Authority (FCA) launched the world’s first regulatory sandbox in June 2016 and such initiatives’ popularity has surged in recent years. There are now 111 ‘regulatory sandboxes’ across the world, according to the ‘Global Regulatory Innovation Dashboard’ (GRID) – a digital interface recently launched by the Cambridge Centre for Alternative Finance (in the UK).
But an analysis recently published by the International Monetary Fund (IMF) has questioned many sandboxes’ efficacy. ‘Institutional Arrangements for Fintech Regulation: Supervisory Monitoring’ urges authorities to think carefully about whether devoting resources to new mechanisms such as sandboxes to help with private-sector engagement is worthwhile, stating that for most authorities existing structures will likely do a better job.
A footnotes in the published script of Pham’s speech acknowledges that the adoption of regulatory sandboxes in the US has been ‘slow and challenging’.
CFTC chairman Rostin Behnam announced a reorganisation of the regulator’s fintech and customer protection-related efforts in July last year, with a press release issued at the time describing the agency as ‘evolv[ing] to address changing markets and market demographics’.
This involved the creation of an Office of Technology Innovation (OTI), formerly known as LabCFTC, and promoting Jorge Herrada to be its first director.
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