The UK has built positive momentum around tokenisation from a legal and regulatory perspective, however, more needs to be done if it wishes to become a leader in securities tokenisation. According to UK Finance, the UK banking and financial trade association, there are three main ways in which the country can accelerate the capital markets’ digital acceleration.
From promoting interoperability and safe innovation at scale to enabling innovation and experimentation, there are a lot of ways the UK can still improve the uptake of securities tokenisation (digital representation of real assets). The report by UK Finance, Unlocking the power of securities tokenisation, specifically looks at the inefficiencies in the UK financial system and how tokenisation can improve them. According to the report, produced in conjunction with Oliver Wyman, many benefits of tokenisation are yet to be realised.
Currently, tokenised issuances are still a fraction of traditional securities issuance. However, the UK is looking to change this through flagship legislative initiatives. The Financial Services and Markets Act allows HM Treasury to introduce financial market infrastructure (FMI) regulatory sandboxes for distributed ledger technology (DLT) projects. The Law Commission and UK Jurisdiction Taskforce have also carried out significant work.
Despite positive momentum around tokenisation from a legal and regulatory standpoint, there is little tokenised securities issuance activity in the UK. Especially when compared to other jurisdictions.
The towel shouldn’t be thrown in yet though for the tech’s development in the UK. Other countries have been experimenting with tokenisation. Most of these focused on tokenising specific parts of the lifecycle rather than end-to-end. However, the UK can learn from these jurisdictions.
For example, leading jurisdictions have focused first on putting in place the legal and regulatory frameworks that give industry participants the confidence to interact with tokenised securities.
The report lays out three key areas that the UK needs to focus on to become a leader in securities tokenisation:
Mission One: Enable innovation and experimentation, underpinned by legal and regulatory certainty
Legal and regulatory certainty is essential. UK Finance commends the strong work undertaken by the Law Commission in its recent Digital Assets report. It also commends the UK Jurisdiction Taskforce, as well as by the Law Society.
We should maintain momentum to drive certainty and confidence in the UK by making the necessary regulatory and statutory refinements. In addition, industry participants require the freedom to innovate around securities tokenisation and the availability of a dedicated space for experimentation. A highlight of key recommendations include:
- HM Treasury should urgently further define the roadmap for the FMI Sandbox, including a view of how it will prevent cliff-edge effects when the Sandbox ends.
- The Financial Conduct Authority (FCA), the PRA and the Bank of England should provide further flexibility on central securities depositories regulation (CSDR) and any provisions to allow industry participants to navigate the requirements to use a CSD.
- HM Treasury and the Bank of England should continue to support the development of digital cash solutions to enable the settlement of transactions.
- HM Treasury via the debt management office should issue a digital gilt within the FMI Sandbox.
Mission Two: Foster a flourishing UK digital market by promoting interoperability and safe innovation at-scale
For the UK to achieve this mission, there needs to be market liquidity and a scaled-up, connected market for tokenised securities. Recommendations to achieve this include:
- HM Treasury, the FCA, and the Bank of England should encourage industry participants to convene and develop voluntary standards around tokenised securities.
- HM Treasury should explore if there is industry appetite for a shared, national infrastructure for tokenised securities
Mission Three: Become a leader in global standards for the tokenised securities market
The UK needs to play an active role in facilitating the establishment of supranational standards that will enable interoperability of distributed technology networks as they evolve. These standards are still in the early stages.
There is an opportunity for the UK to establish itself as a leader by convening different jurisdictions to agree the path forward, and sponsoring initiatives to drive convergence. As part of this, the UK should collaborate with other jurisdictions such as Singapore or the EU. It should connect to their pilots or sandboxes to align international initiatives and form the basis of cross-border tokenisation ecosystem.
Find the complete list of recommendations in Chapter 3 of the report.
The benefits of securities tokenisation
Bob Wigley, chair of UK Finance, said: “Securities tokenisation is likely to transform financial markets, through delivering lower costs, lower risks, and wider market access. But without continued bold action the UK risks falling behind other jurisdictions.
“In today’s new report, we worked with a wide range of market participants, the government, and regulators to outline the benefits of securities tokenisation and highlight the challenges the UK needs to overcome.
“The opportunities that tokenisation presents are substantial and given the UK is a leading global financial centre, we need to be at the forefront of developments.”
Lisa Quest, head of UK and Ireland, and co-head of the public sector and policy practice, Europe, Oliver Wyman, said: “Tokenisation has the potential to shift the way assets are managed and leveraged in a transformative way.
“This report marks an exciting milestone for government and industry to unlock that opportunity.
“It highlights some key actions that can promote innovation and the eventual interoperability of solutions, while also ensuring that the UK’s markets remain highly competitive and underpinned by the technology that will power markets of the future.”
