There is an urgent need for the UK to press ahead with the digital transformation of its financial services industry – especially its capital markets – to secure its status as a world-leading international financial centre, according to a new report out today from TheCityUK and Hogan Lovells.
The report, ‘The digitalisation of UK capital markets: digitalised financial market infrastructure and tokenised bonds’, makes clear that for the UK to play a leading role in shaping the future of the global financial system, government, regulators and industry together need to scale and speed up the adoption of new technologies to become a key jurisdiction for digital capital markets.
It focuses on the significant opportunities that distributed ledger technology (DLT) and the tokenisation of securities present to the digitalisation of the UK’s financial market infrastructure (FMI) and the bond market. The jurisdictions that lead this global transformation are expected to attract greater investment into their economies. Given the fundamental role of FMIs to the overall financial industry, rapid digitalisation would offer huge potential to unlock the growth of capital markets and the wider economy.
While the UK has taken positive steps to encourage a regulatory environment that supports financial markets digitalisation, and momentum is building for tokenisation, it is lagging behind markets such as France, Germany, Luxembourg, Hong Kong and Singapore when it comes to digital bond issuance.
The report sets out concrete actions for the government, regulators and industry to take forward in the near and medium term to maintain the UK’s status as a world-leading international financial centre and support the government’s growth mission. These priority steps that can facilitate urgent digitalisation include industry collaboration; encouraging safe use of regulatory sandboxes to carry out trades in digital assets; enabling digital payments in return for digital assets; demonstrating government leadership by taking concrete steps towards issuing a pound sterling digital gilt; and providing regulatory clarity on the collateral treatment of digital assets.
To support the widespread adoption of DLT-solutions and avoid market fragmentation, the report also emphasises the importance of common industry standards and interoperability.
John Godfrey, Managing Director, Public Affairs, Policy and Research, TheCityUK said, “Well functioning capital markets are the engine of the UK. They deliver vital capital for growth and investment, financing the net-zero transition and underpinning jobs, pensions and savings. To ensure they can continue to deliver these outcomes and remain globally competitive, it is critical that the UK keeps pace with the rapidly evolving tech innovations transforming capital markets in other jurisdictions. The window of opportunity is now, and we urge government, regulators and industry to work together to realise this vision.”
Sharon Lewis, Head of Financial Institutions & Co-Chair of Digital Assets & Blockchain Practice, Hogan Lovells International, said, “The digitalisation of capital markets is vital to the UK’s competitiveness and growth agenda. Whilst we have seen technology transform the retail market over the last decade, the wholesale market has lagged behind. The use of distributed ledger technologies not only improves speed and efficiencies but promises to entirely transform wholesale finance – unlocking capital and developing new products.
“It was a pleasure to collaborate with TheCityUK to shine a light on what action the government, regulators, and industry, must take to enable this digitalisation, and ensure that the UK maintains its status as a world leading financial centre.”
Key recommendations within the report include:
- Greater collaboration between the government, industry and regulators to adopt industry-wide standards for the consistent and safe use of DLT and digital assets across both primary and secondary markets. (government, regulators, industry)
- Considering lessons learned from the EU's DLT Pilot Regime to ensure that the UK Digital Securities Sandbox provides an attractive forum for firms to test new trading and settlement models. (regulators)
- Providing further clarity on the regulatory treatment of stablecoins and tokenised deposits. (government, regulators)
- Establishing the UK as a global leader by taking concrete steps toward issuing a pound sterling digital gilt and ensure that the timeline and project sequencing for a digital gilt are designed to foster secondary market use cases. (government)
- Leveraging the opportunities presented by the National Wealth Fund to incentivise private sector investment in tokenisation. (government, industry)
A full list of the recommendations are set out on pages 9-10 of the report, which can be found: https://www.thecityuk.com/our-work/the-digitalisation-of-uk-capital-markets/