The Bank of England and the Financial Conduct Authority are consulting on their proposed approach to operating the Digital Securities Sandbox. The Sandbox is an initiative aimed at helping to facilitate the adoption of innovative technology in digital assets in the UK.
It follows the Financial Services and Markets Act 2023, which provides HM Treasury the power to legislate to create Financial Market Infrastructure Sandboxes.
The Sandbox will modify regulations in the UK to enable financial market participants to use new technology, such as Distributed Ledger Technology, in the trading and settlement of digital securities such as shares and bonds. Successful applicants to the Sandbox 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 Sandbox will be open to a wide range of firms, including new financial markets infrastructure providers, to maximise the opportunities to learn and for the UK financial system to benefit from private sector innovation and competing business models.
The Bank and the FCA say that the Sandbox 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. They also say that 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 services, the Sandbox will help to create an end-to-end digital wholesale infrastructure that embraces new technology.
The Sandbox will last five years and may lead to a new permanent regulatory regime for securities settlement under which firms could operate in future. The UK government has the tools to put in place permanent changes reasonably quickly. To protect financial stability, activity in the Sandbox over this period will be subject to limits.
The consultation invites views from interested participants on how the Sandbox will operate in practice, to maximise the potential benefits from the technology while protecting financial stability and market integrity.
Alongside the consultation paper, the Bank and the FCA published:
- Draft guidance for firms looking to enter the Sandbox, including details of how the Bank proposes to allow firms to scale their activities once authorised to undertake live activity in the Sandbox. This approach is consistent with the Bank’s commitment to the key objective of maintaining financial stability.
- A detailed breakdown of how existing regulations related to securities depositories will be transposed into ‘Rules’ at different stages of the Sandbox.
The consultation ends on 29 May 2024. The Bank and the FCA will publish final guidance for firms and open the Sandbox for applications in Summer 2024.
