London, UK – The Bank of England and Financial Conduct Authority (FCA)’s consultation on the UK’s Digital Securities Sandbox, which concluded last week, has revealed significant concerns regarding the Sandbox’s limitations, particularly around monetary limits and the lack of discussion surrounding digital currencies.
The Sandbox, launched in January for a five-year period, temporarily relaxes certain legal requirements for central securities depositories (CSDs), facilitating experimentation with distributed ledger technology (DLT) and tokenization. However, several stakeholders expressed concerns about its effectiveness, arguing that its current structure presents obstacles to innovation.
Digital Currency Concerns
The consultation document received criticism for its limited discussion of digital currencies, particularly given the inherent potential of blockchain technology for instant settlement. While the Bank of England alluded to synchronized settlement using its real-time gross settlement (RTGS) system, it did not provide concrete details on its availability.
Several respondents, including UK Finance, the Global Blockchain Business Council (GBBC), and the International Regulatory Strategy Group (IRSG), advocated for the use of systemic stablecoins and electronic money issued by commercial banks within the Sandbox. They argued that the absence of these digital currencies puts non-bank participants at a disadvantage, particularly considering the limited access to Fnality’s tokenized settlement infrastructure.
Monetary Limits: A Major Hurdle
The proposed monetary limits for each asset class, distributed equally amongst participants, also drew criticism. UK Finance highlighted the potential for a single large issuance to exhaust a firm’s limit, suggesting instead a firm-by-firm allocation. Similarly, the IRSG cautioned against replicating the EU’s DLT Pilot Regime’s low limits, which have discouraged significant participation from incumbents.
The IRSG further emphasized that the current limits are impractical for testing digital gilts (UK Treasury bonds) and would hinder the ability of a CSD to effectively serve a large portion of the market.
Calls for Flexibility and Greater Inclusion
Beyond the specific concerns about digital currencies and monetary limits, the feedback emphasized the need for greater flexibility and inclusivity within the Sandbox framework.
Several respondents, including UK Finance and ICMA, argued for a more international approach and flexible timelines for Sandbox activity scaling. They also highlighted the need for more adaptable capital requirements, particularly for startups, which face significant licensing and regulatory costs.
The GBBC expressed concern that the Sandbox’s design favors incumbent institutions, creating a barrier to entry for startups.
Looking Ahead
The feedback received during the consultation provides valuable insights for the Bank of England and the FCA as they develop the UK’s digital securities ecosystem. Addressing the concerns around digital currency, monetary limits, and inclusivity will be critical for the success of the Sandbox and its ability to attract meaningful participation from both established players and emerging innovators.
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