The SEC’s joint work with El Salvador on crypto “regulatory sandboxes” is frankly kind of fishy. Two pilot programs, totaling less than $10,000 combined, to educate the SEC’s new Crypto Task Force on digital assets? That’s less than what the average American pays for a used car of modest quality. Traditionally, the touted justification for this has been concerns about real heavy-handed regulation. Or is that just a performative smokescreen used to collect data while patently avoiding the elephant in the room – El Salvador’s very artistic adoption of Bitcoin?

Salvador's Bitcoin Gamble A Regulatory Model?

El Salvador’s adoption of Bitcoin as legal tender has been, at best, contentious. President Bukele's government has faced criticism for its handling of the rollout, the lack of transparency, and the potential risks to the country's financial stability. Forward looking now, the SEC wants to use this as a sandbox? Are we seriously arguing that a country whose government dollar cost averages Bitcoin on the way down has acted responsibly? Now, that’s a strong statement for regulatory innovation!

That seems like the same idea as learning about financial responsibility by watching a problem gambler.

The idea that the SEC can glean meaningful insights from El Salvador's experience, and then translate them into effective regulations for the US market, seems incredibly naive. Our markets are very different. Our regulatory threats are supposedly stronger, mismatched regulators, and our economies are worlds away. So what might be working (or not working) in El Salvador won’t necessarily translate directly over here.

Tokenized Dreams, Regulatory Nightmares?

One pilot program involves tokenized property shares. Sounds innovative, right? Let's think about the implications. As for investor comfort, El Salvador has a long history of corruption and pretty weak property rights to boot. Should we be fine with US brokers facilitating consumers’ investments in assets that could be ensnared in litigation? What of the charge of potential government censorship? Are we inviting regulatory arbitrage as a result? Companies could take advantage of the weaker regulations in place in El Salvador to sidestep stricter requirements at home in the U.S.

  • Scenario 1: Tokenized property shares – Potential for fraud and exploitation given El Salvador's history.
  • Scenario 2: Capital raising via tokenized shares – Risk of unregulated securities offerings.

Unfortunately, these “low-cost” pilot programs might do more harm than good. Now picture a situation where investors are left high and dry because of fraudulent activity or regulatory gaps in El Salvador. Who's going to be held accountable? The SEC? El Salvador's CNAD? Good luck with that.

Hester Peirce's Vision Or Faustian Bargain?

That’s why Commissioner Hester Peirce’s long-standing advocacy for cross-border sandboxes during her tenure at the SCC is so famous. In her view, these sorts of initiatives can help create an environment of experimentation and partnership. But at what cost? Is it really worth chasing that innovation by doing business with a partner country that has such a dismal human rights record? What about their wobbly financial system—does that raise eyebrows?

The SEC's Crypto Task Force staff attended the meeting with El Salvador's CNAD, but no Commissioners were present. Does that mean the SEC isn’t being serious enough about this initiative? Or is it an orchestrated intervention to strategically insulate them from any backlash.

The optics here are terrible. The SEC risks being seen as tacitly endorsing El Salvador's policies, regardless of the country's actual performance or ethical considerations. It's trading reputation for potentially tainted data.

Frankly, this whole thing feels like a desperate attempt to catch up in the crypto regulation game by cutting corners. Real regulation takes real resources, extensive and rigorous research, and a dedication to making and keeping the investor whole. It's not something you can achieve with a couple of $10,000 pilot programs in a country that's basically a Bitcoin experiment gone wild.

We need to ask ourselves some tough questions: Is the SEC truly interested in fostering innovation, or is it simply seeking cheap data at the expense of regulatory rigor and potentially, El Salvador's financial stability? Curious to learn more about crypto in good faith? Or are you merely posturing with empty promises to buy time? The key question, the most important question, is this: are we comfortable with the unintended consequences of this experiment.