UK to Exclude ‘Unbacked’ Cryptocurrencies From Digital Securities Sandbox Initiative
July 11, 2023

UK to Exclude ‘Unbacked’ Cryptocurrencies From Digital Securities Sandbox Initiative

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While the adoption of crypto could lead to improvements in market efficiency, transparency, and resilience, the UK government doesn’t expect that the existing legislative framework for derivatives and so-called unbacked crypto assets will be changed in the nearest future.

This is according to the consultation paper released today by the Treasury outlining its plans for the Digital Securities Sandbox (DSS), which is being launched under the powers granted as part of the UK’s Financial Services and Markets Act 2023 that became law last month.

The primary objective of the DDS initiative is to create a more flexible regulatory environment for digital securities, encompassing both native digital securities and tokenized representations of existing securities.

However, it will exclude unbacked crypto assets such as Bitcoin or Ethereum, collectively referred to by the Treasury as an asset type closely interlinked with the advancement of novel technologies such as Distributed Ledger Technology (DLT). This asset type also includes exchange tokens, said the paper.

“The regulatory landscape, both in the UK and as a globally coordinated response, is still evolving,” said the Treasury. “Until there is more certainty in these frameworks, we are intending to utilize existing regulatory initiatives to develop policy and regulation for this asset class.”

The same approach will be applied to derivative transactions in the underlying assets since the focus of the DSS is to regulate activities that are directly related to securities.

‘Transformative’ potential of cryptocurrencies

Despite excluding unbacked cryptocurrencies from the DDS, the Treasury maintains that the adoption of digital assets could nonetheless introduce radical shifts in market operations.

“The use of digital assets has the potential to be genuinely transformative for financial markets,“ reads the paper.

Initially, the proposed relaxation of legislation within the DSS is expected last up to five years, targeting digital bonds and equities, as well as digital versions of assets such as money market instruments, with the possibility of being extended by the Treasury.

The Financial Services and Markets Act 2023 is expected to lay the groundwork for the advancement of the blockchain sector, paving the way for the establishment of “sandboxes,” which are controlled environments that facilitate the testing and adoption of new technologies, such as blockchain, within financial markets.

It also defined crypto assets as “cryptographically secured digital representation of value or contractual rights,” considering them as regulated financial instruments, products, or investments, while also recognizing crypto trading as a regulated financial activity.

Today’s news also comes hot on the heels of the UK’s Financial Conduct Authority (FCA) announcing that companies promoting cryptocurrencies to British customers must abide by the existing financial promotion regime by October 8, 2023.

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