That's the same policy as used in ACSCA. After you have obtained your blue belt (any local instructor can offer blue belt), if you can win the 1st or 2nd place in national event, you can obtain your 1st degree black belt that way (black belt can only be offered by ACSCA). In ACSCA, even if you may obtain your 1st degree by skill testing, without winning 1st of 2nd place in tournament, the 2nd degree black belt will block you forever. Only good tournament record can help you to pass the 2nd degree black belt.
I like this policy. If one doesn't compete in tournament, his 1st degree black belt will be his lifetime limitation.