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Bank of England and FCA advise on Digital Securities Sandbox

The Bank of England (the Bank) and the Financial Conduct Authority (FCA) (collectively the “Regulators”) are consulting on their proposed approach to the operation of the Digital Securities Sandbox (DSS). The DSS is an initiative by regulators to help facilitate the adoption of innovative digital asset technologies in the UK.

The DSS will change regulations in the UK to enable financial market participants to use new technologies – such as distributed ledger technology (DLT) – when trading and settling digital securities such as stocks and bonds. Successful applicants to the DSS will be able to provide securities custody and settlement services and operate a trading venue under these amended regulations. For the first time, they can offer these services from a single legal entity. The DSS is open to a wide range of businesses, including new financial market infrastructure (FMI) providers, to maximize learning opportunities and enable the UK financial system to benefit from private sector innovation and competing business models.

The DSS represents an important step in exploring innovation in digital assets in the UK and could lead to faster and cheaper ways for financial market participants to trade, settle and use these securities. The introduction of new technologies in this area, if done safely, could lead to technological change that will lead to greater efficiency and greater resilience of the financial system in the long term. In addition to the Bank's work to research and develop innovations in wholesale payments, including through improving Real-Time Gross Settlement (RTGS) services, the DSS puts the UK in a strong position to provide end-to-end -System to create digital wholesale infrastructure that includes new technologies.

The DSS will last for five years and could lead to a new permanent regulatory regime for securities settlement under which companies could operate in the future. The government has the tools to implement lasting change relatively quickly. To protect financial stability, activities in the DSS are subject to restrictions during this period.

The consultation will invite interested participants to provide their views on how the DSS will work in practice to maximize the potential benefits of the technology while protecting financial stability and market integrity.

Sasha Mills, executive director of financial markets infrastructure at the bank, said:

“The Digital Securities Sandbox is an important tool for regulators to learn how we need to respond to safely benefit from technological developments and changes to key 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 the views of potential participants and look forward to working with the FCA, government and industry throughout the life of the DSS.”

Sheldon Mills, executive director of consumer and competition at the FCA, said:

“The new Digital Securities Sandbox changes the way we regulate by allowing companies to test regulatory changes against real-world situations before those changes become permanent. We hope this will be a more effective, collaborative and faster way to achieve regulatory change.

“The new sandbox also helps strengthen the UK’s leading position as a global and dynamic financial center by driving the adoption of new technologies for trading and settlement of traditional assets such as bonds and shares.

“We continue to work with the Bank of England, government and industry to leverage new technologies while protecting the integrity and cleanliness of UK markets.”

In addition to the consultation paper, regulators have published:

  • Draft guidance for companies wishing to join the DSS, including details of how the Bank proposes to enable companies to scale their activities once they are eligible to conduct live activities on the DSS. This approach is consistent with the Bank's commitment to the main objective of maintaining financial stability.
  • A detailed breakdown of how existing regulations relating to securities depository institutions will be translated into “rules” at the various stages of the DSS.

Feedback on the consultation is possible until May 29, 2024. Subject to feedback, regulators propose to publish final guidance for companies and open the DSS to applications in summer 2024.

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