News release
The Bank of England (the Bank) and Financial Conduct Authority (FCA) (collectively the ‘regulators’) 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.
Sasha Mills, Executive Director for Financial Market Infrastructure at the Bank said:
“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. This consultation is an innovative approach for regulators and an exciting milestone in supporting innovation in the financial industry. We welcome views from potential participants and look forward to working with the FCA, government and industry over the lifespan of the DSS.”
Sheldon Mills, Executive Director, Consumers and Competition at the FCA said:
“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.
“The new sandbox also helps strengthen the UK’s leading position as a global and vibrant financial centre, by driving adoption of new technologies for trading and settling traditional assets, like bonds and equities.
“We continue to work with the Bank of England, government and industry to harness new technologies while also protecting the integrity and cleanliness of UK markets.”
Alongside the consultation paper, regulators have published:
- Draft guidance for firms looking to enter the DSS, including details of how the Bank proposes to allow firms to scale their activities once authorised to undertake live activity in the DSS. 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 DSS.
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.
Notes to editors
- Digital Securities Sandbox joint Bank of England and FCA consultation paper
- The proposals in this consultation paper follow Parliament’s adoption of the Financial Services and Markets Act 2023, which gave HM Treasury the power to legislate to create Financial Market Infrastructure (FMI) Sandboxes to be operated by regulators. HM Treasury consulted on the DSS in July 2023, and laid the relevant Statutory Instrument (SI) creating the DSS in December 2023.
- The predominant existing legislation being tested is the UK Central Securities Depositories Regulation (CSDR). This is amended via the DSS Statutory Instrument and through transposing of firm-facing requirements into rules. These rules will be applied to firms through Bank supervision in proportion to the amount of live activity an authorised firm is permitted to undertake.
- Firms seeking to operate securities settlement systems (and/or other activities currently carried out by Central Securities Depositories (CSDs)) will be authorised by the Bank as Digital Securities Depositories (DSDs). This includes the maintenance and issuance of securities recorded on DLT.
- The DSS will support multiple asset classes, including equities, corporate and government bonds, asset-backed securities, units in collective investment schemes,
short-term money market instruments such as commercial paper and certificates of deposit, and emissions allowances. Derivative contracts that require settlement on a settlement system, and unbacked cryptoassets such as Bitcoin, are not in scope for the DSS. The DSS will support both digitally native issued securities and digital (tokenised) representation of existing securities. - The DSS will be open for applications to firms that are UK registered and able to identify regulatory barriers that prevent the proposed activity being carried out under existing regulations.
- The Bank is continuously developing wholesale payments. Alongside the new omnibus accounts available as part of the Banks’ Real-Time Gross Settlement (RTGS) service, the Bank is exploring as part of its future roadmap for RTGS the possibility of using a synchronised settlement interface to allow RTGS to interoperate with other ledgers (such as digital securities ledgers in the DSS).