UK Excluding Unbacked Cryptos from Digital Securities Sandbox Initiative

The UK government ruled out plans to amend the legislative framework to accommodate derivatives and unbacked cryptos like Bitcoin.
The UK government acknowledges the potential of adopting cryptos to improve market efficiency, bolstering resilience and transparency. Nonetheless, it dismisses the possibility that it would soon amend the current legislative framework to regulate derivatives and unbacked crypto assets.
Ethereum and Bitcoin Excluded from DSS as Digital Securities
The government clarified the stance in the consultation paper released on Tuesday, July 11, detailing plans formulated by His Majesty’s (HM) Treasury for digital assets. The consultation paper describes the plans the Treasury harbors for the Digital Securities Sandbox (DSS) initiative.
The paper reveals that the Treasury is bound to launch DSS by the Financial Services and Markets Act 2023 following its Royal assent by King Charles III into law in June.
DSS aims to formulate a flexible regulatory ecosystem for digital securities. The initiative aims to deliver a comprehensive regulatory framework integrating native digital securities and their respective tokenized representation.
The consultation paper clarifies that it excludes unbacked cryptos, including exchange tokens, Ethereum and Bitcoin. Treasury identifies them as unique crypto assets closely attributed to advancing novel tech such as distributed ledger technology (DLT).
The Treasury acknowledges that the existing regulatory landscape is evolving in the UK and globally through a coordinated response. However, HM Treasury restates its intention of utilizing the existing regulatory initiatives to formulate its policy for the exclusive asset class until the frameworks attain certainty.
The consultation paper reiterates the Treasury would deploy a similar approach to the derivative transactions. It explained its stance, citing the DSS focus as regulating activities directly linked to the securities.
Crypto has the Inherent Potential to Transform Market Potential
The HM Treasury downplayed the exclusion of unbacked cryptos from the DSS initiative by holding that adopting digital assets would trigger radical shifts in the market operations. The consultation paper emphasizes that digital assets have genuine transformative input towards the conventional financial markets.
The Treasury projects the relaxation that the Treasury proposes to the legislation surrounding DSS to last for five years. The scope targets digital-based equities and bonds. The tone adopted by the consultation paper indicates that the Treasury could extend the stance to other digital versions to include money market instruments.
The HM Treasury anticipates the Financial Services and Markets Act 2023 will lay the groundwork to advance the blockchain sector. In particular, the Treasury expects it to facilitate establishing sandboxes. The paper defines the sandboxes as a controlled environment uniquely designed to test and expedite the adoption of new tech, primarily blockchain, in the financial markets.
The consultation paper revisits the crypto asset definition in the newly assented Act as all digital representations of contractual rights and values that feature cryptographical security. Such constitutes regulated financial investments, products, and instruments. Besides, the law identifies crypto trading to constitute a regulated financial activity.
FCA Issues October Deadline for Entities to Comply with Digital Assets Promotion Regime
The news of excluding the unbacked cryptos from the DSS coincides with the pronouncement by UK’s Financial Conduct Authority (FCA) early this month that entities prompting digital assets to British customers must comply with the current promotion regulation by October 8, 2023.
The letter by Victoria McLoughlin and Lucy Castledine of FCA’s Digital Assets Supervision, Policy, and Competition department interpreted the financial promotion to feature websites, mobile applications, online advertising, and social media posts. The Tuesday, July 4 bulletin directed the firms to register and pay fees upon approval.
The letter obligated the companies to inform the financial regulator of the steps they would undertake in response to the notice. FCA’s letter set an August 4 deadline to communicate back to the directive, though acknowledged the regime would become effective later in 2023.
The letter warned that FCA would not only target the firms operating within the UK jurisdiction. Instead, it would implement the directive to all marketing schemes whose activities affected British customers. FCA emphasized that entities that fail to comply with the financial promotion directive will bear criminal charges.