The UK government has announced that it will commence live testing of Distributed Ledger Technology (DLT) to carry out the trading and settlement of stocks and bonds as well as other traditional market activities.

BACKGROUND

The Treasury will launch a financial market infrastructure "sandbox" next year to test trading traditional financial assets using DLT. This sandbox is an isolated environment in which real customers will carry out transactions overseen by regulators. Regulators will be able to make changes to the system in order to ensure maximum user benefit.

It is hoped that the technology will rationalise the three individual stages of trading, clearing and settlement into one seamless transaction which could allow for the same-day issuing of financial assets, without the need for a bank. Transactions taking place using DLT will typically involve a shared ledger which allows the participants to authenticate the transaction and thereby allow a new, permanent record to be added to the ledger.

This development will be formalised under a new financial services bill which will be introduced to parliament later this year. This bill will also incorporate the regulation of stablecoins, which are cryptocurrencies whose value is pegged to another traditional financial asset in order to counter the inherent volatility of cryptocurrencies. Additionally, the Treasury and the Bank of England have launched a joint taskforce to consider the implications of introducing a central bank digital currency, followed by a public consultation later this year.

These plans indicate the government's commitment to modernising the relevant financial infrastructure and regulatory framework in order to set out the UK's stall as a global "crypto hub".

Such technology, if implemented, could have the power to transform the financial markets, cutting the time needed and reducing the costs of trading traditional financial assets.