The Bank of England (BoE) and the Financial Conduct Authority (FCA) of the United Kingdom have initiated a comprehensive consultation process to gather feedback on the draft guidance for their Digital Securities Sandbox (DSS). This sandbox is specifically designed for testing distributed ledger technology (DLT) applications.
Through this sandbox, participants will have the opportunity to experiment with various products and services built on DLT. The objective is to foster innovation and explore the potential applications of DLT across different sectors. The sandbox is expected to be operational by autumn 2024, providing a structured environment for testing and development in the realm of digital securities.
British regulatory authorities introduce a Digital Securities Sandbox to stimulate innovation in the financial sector.
The joint consultation and draft guidance released on Wednesday, April 3, outline the Bank of England Digital Securities Sandbox (DSS), which is anticipated to operate for a duration of five years. This initiative holds the potential to establish a novel regulatory framework for securities settlement in the UK. The primary objective of the DSS is to adapt regulations within the UK financial landscape to accommodate technological advancements such as Distributed Ledger Technology (DLT), particularly for the trading and settlement of digital securities such as shares and bonds.
Both the Bank of England (BoE) and the Financial Conduct Authority (FCA) have aimed to onboard the initial cohort of applicants onto the DSS by autumn 2024. Sheldon Mills, Executive Director at the FCA, emphasized the significance of this initiative in a statement:
“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. We hope this will be a more effective, collaborative and quicker way of delivering regulatory change.”
Participants in the sandbox will have the chance to explore offering securities depository and settlement services, along with operating trading venues, all under modified regulations. This represents a notable shift, as firms will now be able to provide these services through a single legal entity.
The regulator emphasized that the DSS will be inclusive, welcoming various firms, including new financial markets infrastructure (FMI) providers.
Importantly, the consultation seeks input from interested parties on how to operationalize the DSS effectively, aiming to maximize the benefits of technology while ensuring financial stability and market integrity. This approach is designed to enhance learning opportunities and promote innovation within the UK financial system, facilitating the examination of different business models.
Moreover, the DSS is envisioned to spur innovation in digital assets, potentially leading to more streamlined and cost-effective trading, settlement, and utilization of securities among financial market participants.
The Bank of England and the Financial Conduct Authority (FCA) have released draft guidance for the Digital Securities Sandbox, seeking feedback until May 29.
Accompanying the release of the consultation paper, regulatory bodies have provided draft guidance aimed at firms expressing interest in joining the Digital Securities Sandbox (DSS). This guidance delineates the process for scaling activities once firms receive authorization for live activity within the sandbox. Additionally, a comprehensive breakdown has been offered regarding how existing regulations pertaining to securities depositories will transition into ‘Rules’ at various stages of the DSS.
Stakeholders are encouraged to provide feedback on the consultation, with the window for submissions remaining open until May 29, 2024. Pending the receipt and analysis of this feedback, regulators aim to finalize the guidance for firms and commence DSS applications in the Summer of 2024. Following this, the Bank of England (BoE) and the Financial Conduct Authority (FCA) will carefully scrutinize the feedback received and proceed to accept applications by the summer, with the first wave of applicants anticipated to partake in the initiative by autumn.
The journey towards the inception of consultations on the DSS commenced back in July 2023, initiated by the UK Treasury. This initial step led to extensive discussions, culminating in the U.K. government’s response outlining plans to enact legislation to implement the initiative by November. Subsequently, new regulations were introduced in December, offering regulatory frameworks for overseeing the sandbox by the nation’s financial watchdogs. These regulations were formally enacted on January 8, as part of the U.K.’s Financial Services and Markets Act 2023.
