The Bank of England and Financial Conduct Authority (FCA) are consulting on their proposed approach to operating the Digital Securities Sandbox (DSS).
The DSS is an initiative run by the regulators that will help facilitate the adoption of innovative technology in digital assets in the UK.
The DSS will modify regulations in the UK to enable financial market participants to use new technology – such as Distributed Ledger Technology (DLT) – in the trading and settlement of digital securities such as shares and bonds. Successful applicants to the DSS will be able to provide securities depository and settlement services and operate a trading venue under those modified regulations.
For the first time, they will be able to provide these services from a single legal entity. The DSS will be open to a wide range of firms, including new financial markets infrastructure (FMI) providers, to maximise the opportunities to learn and for the UK financial system to benefit from private sector innovation and competing business models.
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 adoption of new technology in this area, if done safely, could lead to a technological transformation that will promote greater efficiency as well as greater resilience in the financial system in the long run.
Alongside the work that the Bank is doing to explore and develop innovation in wholesale payments, including as part of enhancing the Real-Time Gross Settlement (RTGS) services, the DSS places the UK in a strong position to create an end-to-end digital wholesale infrastructure that embraces new technology.
The DSS will last five years and may lead to a new permanent regulatory regime for securities settlement under which firms could operate in future. The Government has the tools to put in place permanent changes reasonably quickly. In order to protect financial stability, activity in the DSS over this period will be subject to limits.
The consultation invites views from interested participants on how the DSS will operate in practice, in order to maximise the potential benefits from the technology while protecting financial stability and market integrity.
Feedback on the consultation is open until 29 May 2024. Subject to feedback, the regulators propose to publish final guidance for firms and open the DSS for applications in Summer 2024.
