UK Government reports that 19 firms applied to participate in Digital Securities Sandbox tests

The government of the United Kingdom recently revealed that it had received no less than 19 applications from various members of the financial industry who wish to participate in tests of its Digital Securities Sandbox (DSS).

DLT is not supported by the UK legislative framework

The DSS was designed to enable companies to model the operations of a trading venue and a central security depository through the use of digital ledger technology (DLT). This will allow it to accommodate digital assets.

Earlier this year, in July, the UK Government launched a consultation regarding the initiative, interested in seeing the market feedback and thoughts on the matter. The move came after the 2021 Call for Evidence, which was meant to examine potential applications of DL for financial market infrastructures.

At the time, the market participants identified a key issue — the fact that the UK legislative framework was not created to support the use of DLT. The UK then set out to find a way around the issue, which led to the creation of The Sandbox, which is seen as a way of testing the technology via temporary modifications to the existing legislation. However, it is worth noting that it does have the power to alter legislative frameworks, if this proves to be necessary as the tests progress.

The HM Treasury commented on the initiative, stating that, after analyzing the responses, the Government has decided to retain the approach that was outlined in the consultation. “This will involve instituting a broad framework for the DSS in legislation, with the regulators given appropriate flexibility to manage requirements for participating entities,” the Treasury added.

Crypto assets to be excluded from the Sandbox

According to the Government, its intention now is to ensure that all relevant assets that are currently in the scope of the regulatory perimeter are capable of being included in the Digital Securities Sandbox. The only exception will be derivatives.

However, multiple respondents who participated in providing feedback to the consultation have been unsatisfied with the decision to exclude unbacked crypto assets from the Sandbox. The Treasury responded to this, stating that there is no established regime for cryptocurrencies that could be amended in the Sandbox at this time.

In a statement, it said that the FMI Sandbox powers in FSMA 2023 could be a helpful mechanism in the future for assessing appropriate regulatory innovation regarding digital currencies. The Government will, therefore, continue to assess the desirability of further sandboxes in order to help inform the development of regulations and legislations for the crypto space.