The UK’s recent regulatory moves on digital assets and stablecoins have been fairly solid on substance but could benefit from a bit more style. By substance I’m thinking of the
Electronic Trade Documents Act, the recently introduced
Property (Digital Assets etc) Bill and just launched
Digital Securities Sandbox (DSS).
This ‘substance over style’ approach resonates with a niche audience deeply versed in the subject but fails in the, arguably, just as important job, of signalling to the global marketplace that the UK can still be the leading fintech leader it always has
been. In stark contrast, Hong Kong and the UAE are making significant strides here, attracting major institutions like BlackRock, which are eager to explore new asset growth opportunities in these regions.
Regulatory innovation: Time for a reboot?
In recent years the Financial Conduct Authority (FCA) and the Bank of England have not hit those regulatory innovation high notes of previous years. Innovation is obviously not a primary mandate but the shift from the pre-Brexit era is palpable. Today, the
regulatory landscape feels a lot more challenging, although I am hopeful that the launch of the first of the FSMA FMI sandboxes – the DSS – which has just opened for applications, will reboot the FCAs reputation for regulatory innovation.
Participants in the new DSS will be able to issue, trade, and settle real digital securities which can be used in the same way as traditional ones.Firms will be able to use the securities issued inside the sandbox in repurchase agreements or write derivative
contracts based on securities as they normally would any other.
The trading and settlement of derivative contracts and of ‘unbacked cryptocurrencies’ such as Bitcoin are not in the scope of the DSS but equities, corporate and government bonds, money market instruments such as commercial paper and certificates of deposits,
units in collective investment undertakings (fund units) and emissions allowances are all examples of financial instruments that could be issued and traded in the DSS.
One hopes that the UK model will fare better than the EU DLT regulatory sandbox, launched in March 2023. In 18 months, there have been just four applications – far lower than the expected number - and none have been approved. As with the DSS, the goal of
the project is to allow market infrastructure organisations to work out how to host DLT bonds to facilitate trade and a liquid secondary market and was designed to address specific regulatory barriers under MiFID II and the Central Securities Depositories
Regulation (CSDR).
There are signs that a functioning secondary market may emerge without making use of the sandbox – Clearstream and Euroclear - have created bespoke platforms (D7 and DFMi respectively), issued DLT bonds and supported secondary trading without participating
in the sandbox and ultimately without needing the regulatory waiver.
Market momentum: Tokenisation takes the lead
While trade finance and media use cases of DLT have their merits, of which I am a huge supporter, the current momentum lies in the tokenisation of real-world assets and financial services. The market is primed for stablecoins and asset tokenisation.
UK Finance has just published findings from the experimental phase of the Regulated Liability Network (RLN), an initiative aimed at exploring the feasibility
of tokenized deposits and programmable money. The project saw participation from major financial institutions including Barclays, Citi UK, HSBC UK, Lloyds Banking Group, Mastercard, NatWest, Nationwide, Santander UK, Standard Chartered, Virgin Money, and Visa
and the overarching conclusion from this phase is that the RLN stands as a promising platform for innovation. Engaging with regulatory bodies to further this initiative was identified as the next logical step.
The RLN ‘tokenisation platform’ employed a ‘network of networks’ model, granting each bank its own application network. The report found this approach not only supports substantial transaction volumes but also provides banks with operational autonomy and
facilitates the gradual expansion of the broader network. Although the conclusion that “at a practical level it made it tricky to showcase some of the benefits of a shared ledger” does give one pause for thought.
London’s financial future: A call to action to help shape the coming transformation
London’s legacy as a global financial hub is at risk unless it adopts a more proactive stance and gets better at communicating these substantial successes. The fintech boom from 2015 to 2020 underscored the importance of optics and perception. The next decade
will witness the most significant transformation in financial markets since the 1970s’ dematerialisation.
Tokenisation will render all assets global, 24/7, programmable, and composable by default. The UK must ‘think style’ and pivot to a more dynamic and forward-thinking approach to maintain its status as a global fintech leader. The time for action is now.