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Blockchain Sandboxes Could Benefit Everyone, Research Shows

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Businesses keen on using blockchain and governments looking to regulate it should find a middle ground such as making regulatory sandboxes to reach mutually satisfactory agreements, a research on blockchain cybersecurity by Microsoft, Chamber of Digital Commerce, and a law firm Covington and Burling suggested.

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A regulatory sandbox is a testing ground for new business models that are not protected by current regulation or supervised by regulatory institutions. This is especially relevant in fintech sector, where purpose of the sandbox is to adapt compliance with strict financial regulations to the growth and pace of the most innovative companies, in a way that doesn’t smother the fintech with rules, but also doesn’t diminish consumer protection.

The paper, however, only deals with permissioned blockchains. Permissioned blockchain networks allow the network to appoint a group of participants in the network who are given the authority to provide the validation of blocks of transactions. This makes it centralized.

For regulators to understand cybersecurity risk in permissioned blockchains, they first must have a detailed understanding of the technologies and how they operate, the paper says. Industry participants can help provide this understanding by maintaining an open dialogue with regulators regarding the topic. Therefore, regulatory sandboxes can align incentives between regulators and industry by giving regulatory insights into blockchain technologies and industry the ability to test new technologies in a limited live environment.

Certain foreign governments and U.S. state governments are currently evaluating regulatory sandboxes and other testing programs.

The paper also pushes for the adoption of the the U.S. National Institute of Standards and Technology (NIST) Cybersecurity Framework on blockchain networks, calling it “prudential”. Unpermissioned – decentralized – blockchains are not covered in the paper. Still, a step forward for reaching a compromise is always welcome.