The U.K. will start live testing crypto blockchain technology in financial markets activities such as trading and settlement as part of the drive to become a global “crypto hub,” the finance ministry said on Tuesday (June 7) in an event in London.
The U.K. is taking different steps to promote the use of blockchain technology and crypto assets in the country and it is designing a friendly regulatory environment to attract investments.
Gwyneth Nurse, the ministry’s director general for financial services, said that the use of distributed ledger technology (DLT), which is the underlying technology used by crypto assets, is a key priority for making financial markets more innovative. To this end, the U.K. will launch a regulatory sandbox next year for testing DLT projects under the supervision of regulators, Nurse said. A regulatory sandbox is a safe testing environment where companies can implement new projects minimizing the risks for consumers. Sandboxes have been very successful in nurturing FinTech firms in the U.K.
One of the purposes of this new sandbox would be to try DLT projects involving activities such as trading, clearing and settlement, to be able, for example, to issue bonds or stock in hours rather than days or weeks.
This project resembles a European Union initiative to create a pilot regime that aims at developing the trading and settlement of “tokenized” securities. The EU project has received political and regulatory support from the EU institutions and companies may be able to start testing the DLT pilot at the beginning of 2023.
Read more: EU’s ‘DLT Pilot’ to Trade Tokenized Securities Wins Political, Regulatory Support
Interestingly, this push for the crypto sandbox may also accelerate the plans to bring stablecoin regulation, or even a central bank digital currency (CBDC). Digital currencies are needed to fully reap the benefits of a DLT project, respondents to the EU consultation on the DLT pilot regime said.
“To fully realize the expected benefits of tokenized securities, such as reduced counterparty risk and (near) instant settlement, there is a need for credible digital currencies available on DLT to implement on-chain delivery versus payment (DvP) mechanisms. Ideally, this would be in the form of Central Bank Digital Currency (CBDC), and/or other forms of digital cash such as tokenized commercial bank money or stablecoins,” said the International Capital Market Association in its submission.
The U.K. government is planning to introduce stablecoin regulation under a new financial service bill before parliament this year. Additionally, the finance ministry and the Bank of England are jointly assessing a digital pound with a public consultation also later this year, Nurse said. However, a digital pound wouldn’t be available until the second half of the decade even if a decision is taking to go ahead with a CBDC, Nurse said.
The Financial Conduct Authority (FCA) is already working with dozens of companies in its regulatory sandbox. Some of the accepted companies in the past tested blockchain based payment services or DLT based e-money solutions. The FCA accepted 13 applications in 2021, and it has received more than 500 applications since its launch.
While Nurse didn’t specify whether the new sandbox will be separate from the one that FCA is currently operating, the government’s announcement in April to make the U.K. a “crypto hub” suggested that the “financial market infrastructure sandbox” will be a new legislative proposal and separate from the existing regulatory sandbox, although the FCA could still be in charge of its operation.
Read also: UK Stakes Claim to Crypto Leadership, Cites Friendly Regulatory Climate
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