UK Regulators Take Next Steps Towards Digital Securities 'Sandbox'

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The Bank of England and the Financial Conduct Authority have jointly announced a consultation on a proposed approach to operating the Digital Securities Sandbox (DSS).

The regulators say the initiative aims to facilitate the adoption of "innovative technology in digital assets" within the UK financial sector.

The DSS is set to modify existing regulations in the UK to allow financial market participants to leverage new technologies such as Distributed Ledger Technology (DLT) for the trading and settlement of digital securities like shares and bonds.

According to Sasha Mills, Executive Director for Financial Market Infrastructure at the Bank of England, "The Digital Securities Sandbox is an important tool for regulators to learn how we need to react to benefit safely from developments in technology and changes to vital financial market processes such as securities settlement."

Successful applicants to the DSS will have the opportunity to provide securities depository and settlement services as well as operate a trading venue under these modified regulations. Importantly, these services can be provided from a single legal entity, marking a significant departure from previous practices.

The initiative aims to maximise opportunities for learning and innovation within the UK financial system by opening the DSS to a wide range of firms, including new financial markets infrastructure providers.

The regulators says it represents a significant step towards exploring innovation in digital assets in the UK, potentially leading to faster and cheaper ways for these securities to trade, settle, and be utilised among financial market participants.

"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," says Sheldon Mills, Executive Director of Consumers and Competition at the FCA.

In addition to the consultation paper, regulators have published draft guidance for firms looking to enter the DSS, providing details on how firms can scale their activities once authorised to undertake live activity in the sandbox.

Feedback on the consultation is open until 29 May 2024, with the regulators aiming to publish final guidance for firms and open the DSS for applications in Summer 2024, subject to feedback.

The DSS is anticipated to last for five years and may lead to a new permanent regulatory regime for securities settlement, potentially shaping the future landscape of financial markets in the UK.