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UK Treasury Unveils Regulatory Sandbox for Cryptocurrency Innovation

The UK Treasury has unveiled a regulatory sandbox aimed at fostering innovation in the cryptocurrency industry. The Digital Securities Sandbox will provide a controlled environment for financial market firms to test new technologies involving distributed ledger technology (DLT) and digital securities.

Key Takeaways

  • The UK Treasury has created a regulatory sandbox under the Financial Services and Markets Act to allow experimentation with cryptocurrency and DLT technologies.
  • The sandbox aims to facilitate innovation while also managing risks, with regulators overseeing experiments.
  • Financial firms accepted into the sandbox will have adjusted regulatory requirements for up to five years to test new technologies.
  • The sandbox will focus on trials involving DLT for roles like trading venues, securities depositories, and ancillary services.
  • While targeting DLT in general, the sandbox is seen as a way to support cryptocurrency firms and exchanges.
  • The Digital Securities Sandbox rules take effect on January 8, 2024.

Details of the Regulatory Sandbox

Under the Financial Services and Markets Act 2023, passed this June, the UK Treasury has the legislative authority to establish the Digital Securities Sandbox. The regulations give the Treasury power to modify or waive rules for firms participating in the sandbox, with oversight from the Bank of England and Financial Conduct Authority (FCA).

The sandbox is designed for “sandbox entrants” – financial market entities seeking to test new activities involving digital securities and DLT. Trials could involve operating trading venues and functions like maintenance, notary services, and settlement.

While focused mainly on DLT applications, the memorandum acknowledges the origins of the technology in cryptocurrency. It notes that cryptocurrency exchanges have expressed interest in participating in the sandbox.

The Treasury will collaborate with Parliament to turn successful sandbox experiments into permanent legislation.

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