The UK Treasury’s consultation on the Digital Securities Sandbox (DSS) has concluded attracting positive industry feedback. The DSS is expected to be run by the Bank of England and Financial Conduct Authority to facilitate digital asset adoption in the UK. Submissions were received from a range of industry participants including incumbent FMI firms, financial services firms interested in digital assets, new entrants, technology firms and non-governmental organisations.
In HM Treasury's final report published this week, it was noted:
Feedback praised the emphasis on facilitating innovation, without compromising on regulatory outcomes
In the report, the government affirmed its intention to keep the DSS technology neutral and flexible to accommodate different structures. Respondents welcomed this flexibility to test digital securities and distributed ledger technology under a modified legislative framework and regulatory supervision. This is mutually beneficial as it allows UK regulators to set sensible limits on a case-by-case basis and make informed amendments to the rules.
The majority of respondents agreed that 5 years would be an appropriate timeframe for the DSS, given that a permanent legislative framework can be established during this time. There was general support for a cross-industry regulatory body and global coordination for digital assets regulation, emphasising the need for a collaborative approach.
While acknowledging the initiative as a step in the right direction, the industry stressed further clarity surrounding:
the application process, the management of limits set in the DSS, the interaction of activities in the DSS with activities outside…[and] the process for exiting.
In respect of the ambiguities, the government has promised that details will be published by regulators in due course.
The regulations establishing the DSS, The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023, were laid before Parliament on 18 December 2023 and will take effect on 8 January 2024.
The UK government will continue cooperating with regulators and industry to:
identify any further legislative provisions that need to be brought into scope, and if necessary, can facilitate this via further statutory instruments amending the DSS.
The UK Government's swift action to establish a regulatory framework for the DSS is striking as the UK and London continue to evolve as a global financial centre. A number of other jurisdictions are also taking swift action to embrace the promise of blockchain technologies by establishing fit for purpose regulations and regulatory sandboxes. In this context, the time is ripe for Australian policymakers to explore a broader digital asset sandbox for Australian innovators and consumers pending the introduction a comprehensive regulatory framework for digital assets.
By M Bacina, S Pettigrove and K Kim