UK Chancellor, Jeremy Hunt, delivered a budget statement on Wednesday, November 22, that outlines the government’s economic strategy for the coming months. Alongside measures to cut taxes, raise the minimum wage and reduce government spending, the autumn statement committed to launching a new regulatory sandbox for digital securities.
The proposed Digital Securities Sandbox (DSS) is part of the government’s efforts to support financial markets’ adoption of digital technologies. The latest in a string of similar sandboxes, the DSS is intended to provide breathing space in what can otherwise be a stifling regulatory environment.
Between regulations to prevent money laundering, protect consumers, limit risks to the economy and ensure market integrity, the financial services sector has one of the highest compliance burdens of any industry.
To foster innovation in such a highly regulated area, the UK’s Financial Conduct Authority (FCA) established the world’s first regulatory sandbox in 2016.
As a way to explore new financial technologies (FinTech), the FCA framework lets businesses experiment without incurring all the normal regulatory consequences. Sandbox participants also benefit from a direct line of communication with the regulator.
Since 2016, the concept has been adopted by dozens of other countries and 73 sandboxes have now been established around the world.
From the outset, the movement has been especially beneficial to crypto and decentralized finance (DeFi) startups, which operate at the frontier of FinTech innovation.
Looking to build on the success of the FCA sandbox, in 2023 the UK’s Financial Services and Markets Act (FSMA) laid the foundation for similar schemes oriented toward market infrastructures.
The DSS will be the first new sandbox established under the FSMA powers. Run by the Bank of England and the FCA, the initiative will “facilitate the adoption of digital asset technology in UK financial markets,” the government said in recent a consultation paper.
Given that major infrastructure operators like the London Stock Exchange Group (LSEG) are likely to participate in the DSS, it could pave the way for the mass tokenization of UK securities markets.
Already, LSEG has announced plans to launch a new blockchain-powered trading venue as early as next year, a prospect made possible by its participation in the FCA’s existing sandbox.
The field of digital securities has come a long way in recent years. From money market funds to Apple stock , the range of securities investors can access on chain has exploded since the concept first emerged, and demand is rising.
Nevertheless, much of the trade in digital securities still takes place on crypto exchanges or niche platforms.
LSEG and other major exchange operators could play a crucial role in helping the technology go mainstream. But in the UK, a legal framework that could support further digitization has only just started to emerge.
The Treasury’s proposal for a new regulatory regime for crypto assets laid the groundwork. But it also raised many questions. Going forward, the DSS could help answer these questions.
Sandboxes don’t just help businesses navigate complex legal grounds. In the other direction, they can flag areas where regulators have fallen behind the technology of the day, helping them adapt to the latest innovations.