On April 3 2024, the Bank of England (BoE) and the Financial Conduct Authority (FCA) (the regulators) published a joint consultation paper on their proposed approach to operating the Digital Securities Sandbox (DSS).
The DSS is poised to revolutionize the landscape of digital securities trading and settlement in the UK by leveraging emerging technologies such as Distributed Ledger Technology (DLT).
The proposed approach aims to modify existing regulations, enabling financial market participants to utilize cutting-edge technology in trading and settling digital securities like shares and bonds. Successful applicants to the DSS will be granted the ability to provide securities depository and settlement services, as well as operate trading venues under modified regulations, all under a single legal entity.
The initiative seeks to welcome a diverse array of firms, including new financial markets infrastructure (FMI) providers, facilitating learning opportunities and fostering innovation in the UK financial system.
The regulators believe that:
“The DSS represents a major step in exploring innovation in digital assets in the UK and could lead to faster and cheaper ways for these securities to trade, settle, and be utilised among financial market participants.”
The hope is that the safe adoption of new technology in this domain could catalyze a technological transformation, promoting efficiency and resilience in the financial system in the long term.
What Assets Are Within the Scope of the DSS?
The regulators propose only allowing traditional finance assets within the scope of the DSS. Derivatives will only be accepted if settlement occurs outside the DSS. However, cryptoassets like Bitcoin and Ether are outside of the scope.
Eligibility Criteria and Progress through the DSS
The BoE and FCA will work together to operate the DSS. Their aims are to facilitate innovation (to promote a safe, sustainable and efficient financial system); and protect financial stability, market integrity, and cleanliness. As such, they have put forward eligibility criteria, and set out the four main stages of progression through the DSS.
The DSS is slated to operate over a five-year period and may pave the way for a permanent regulatory regime for securities settlement. To ensure financial stability, activity within the DSS will be subject to pre-defined limits.
Sasha Mills, Executive Director for Financial Market Infrastructure at the BoE, emphasized the significance of the DSS, stating:
“This consultation is an innovative approach for regulators and an exciting milestone in supporting innovation in the financial industry.”
Similarly, Sheldon Mills, Executive Director, Consumers and Competition at the FCA, highlighted the collaborative nature of the DSS, stating:
“The new Digital Securities Sandbox reshapes how we regulate by allowing firms to test regulatory changes using real-world situations before these changes are made permanent.”
The consultation period, open until May 29, 2024, invites input from interested parties to ensure the optimal operation of the DSS while safeguarding financial stability and market integrity. The regulators plan to publish final guidance for firms and open the DSS for applications in the summer of 2024, marking a pivotal moment in the evolution of the UK’s financial ecosystem.
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