The HM Treasury has opened consultation on the first financial market infrastructure sandbox – called the ‘Digital Securities Sandbox’ (DSS) – where digital securities will be tested and adopted across financial markets. However, the government is expected to leave out unbacked cryptoassets, which include exchange tokens and derivates.
“The regulatory landscape, both in the UK and as a globally coordinated response, is still evolving,” HM Treasury said. “Until there is more certainty in these frameworks, we are intending to utilise existing regulatory initiatives to develop policy and regulation for this asset class.”
Consult on technology and policies
The DDS will be the first financial market infrastructure sandbox delivered as part of the Financial Services and Markets Act 2023, which became law a few weeks ago. The DSS framework will focus on the regulatory side of use, not on technology, and will allow participants access to a modified regulatory framework for testing and scaling of their activities via Financial Management Information Systems (FMIs).
With the UK ranked as one of the most fintech-friendly countries in the world, the Treasury says that digital assets have the potential to transform financial markets.
“It is difficult to ascertain up front all the legislative and regulatory changes required.”
UK Treasury
With the DSS, the Treasury has set three general aims of the initiative:
- Test how current UK legislation needs to change in order to comply with digital asset technology and the new practices associated with it;
- Enable testing and adopting digital asset technology in FMIs; and
- Test the use of FMI sandboxes as a policymaking concept.
With excluding derivates form the DSS, the government says that they “does not intend to modify the legislative framework for derivative transactions in the underlying assets, nor phase in any requirements in this area”. Yet, they say to be open to consider the possibility to utilise assets issued via DSS FMIs as the basis for derivatives outside the DSS as long as the derivates align with existing legal frameworks like the UK EMIR (UK European Market Infrastructure Regulation).
Changes to legislation
“The uncertainty regarding what the future financial market ecosystem will look like, and what the nature of the risks will be, means it is difficult to ascertain up front all the legislative and regulatory changes required”, the Treasury continues. “It is important that this does not lead to inertia in the legislative and regulatory space, but to acknowledge instead that the job of re-working financial services legislation and regulation will be an ongoing process that may take many years.”
With the consultation, the government seeks feedback from the industry on the approach to the DSS, including opinions on policy and legal issues. It also invites respondents to express their interest to use the DSS.
The consultation closes on August 22, 2023.