UK Treasury unveils regulatory framework for digital securities sandbox – how will investors react?

UK Treasury has unveiled its regulatory framework for a sandbox for digital securities under the Financial Services and Markets Act.

UK Treasury unveils regulatory framework for digital securities sandbox

In a Memo published on Monday, the UK Treasury explained that the purpose of these regulations is to create a regulated framework that allows both companies and regulators to experiment with new technologies in financial markets. This initiative aims to overcome current regulatory challenges and promote innovation in the crypto industry.

These regulations give the Ministry of Finance the authority to waive, adapt or introduce new legal requirements. They also authorize the Bank of England and the Financial Conduct Authority to manage and supervise a sandbox if the Treasury grants the necessary powers.

It is also planned that the findings from the sandbox experiments can be permanently incorporated into legislation through cooperation between the Ministry of Finance and Parliament .

The regulations allow qualified financial market participants to engage as “sandbox providers”. They can carry out approved activities using new technologies under adapted regulatory conditions for a trial period of five years.

The activities specifically mentioned in the legislation include tasks such as “operating a trading venue” and performing various functions related to digital securities, such as maintenance, notarial services and settlement. In addition, companies that have received approval to participate in the sandbox can also carry out ancillary activities directly related to these functions.

The memorandum specifically states that these rules are intended to facilitate experiments in distributed ledger technology and the underlying technology of digital assets. In particular, such tests can use the above-mentioned technologies to fulfill the functions of central securities depository and trading venues.

The memorandum briefly mentions cryptocurrencies and acknowledges that distributed ledger technology has its roots in crypto assets, but highlights the broader applications of DLT. However, the Treasury Department noted that cryptocurrency exchanges are among the companies that have expressed interest in using the sandboxes.

The rules for the digital securities sandbox arise from the powers given to the Treasury through the Financial Services and Markets Act 2023, which was passed in June. These sandbox rules are scheduled to come into effect on January 8, 2024.