Bank of England and FCA Launch Digital Securities Sandbox Consultation for DLT Testing

Bank of England and FCA Launch Digital Securities Sandbox Consultation for DLT Testing

April 4, 2024

UK Regulators Unveil Digital Securities Sandbox to Foster Financial Innovation

The Bank has today published a joint consultation paper with @TheFCA on the Digital Securities Sandbox
https://t.co/eokvOst2J1

— Bank of England Press Office (@BoE_PressOffice) April 3, 2024

The Bank of England Digital Securities Sandbox (DSS), outlined in a joint consultation and draft guidance released on Wednesday, April 3, is slated to operate over a span of five years and could potentially establish a new regulatory framework for securities settlement in the UK.

The DSS seeks to adapt regulations within the UK financial landscape to accommodate advancements such as Distributed Ledger Technology (DLT) for the trading and settlement of digital securities like shares and bonds.

Notably, the BoE and the FCA have set their sights on having the initial cohort of applicants onboard the DSS by autumn 2024. Sheldon Mills, Executive Director at the FCA, conveyed 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 be granted the opportunity to experiment with providing securities depository and settlement services, as well as operating trading venues under modified regulations. This marks a significant departure, as firms will now be able to provide these services under a single legal entity.

The regulator stated that the DSS will be inclusive, welcoming a diverse array of firms, including new financial markets infrastructure (FMI) providers.

Notably, the consultation seeks input from interested parties on operationalizing the DSS to maximize the benefits of technology while upholding financial stability and market integrity. This approach aims to maximize learning opportunities and foster innovation within the UK financial system, allowing for the exploration of competing business models.

Furthermore, the DSS is envisioned to catalyze innovation in digital assets, potentially paving the way for more efficient and cost-effective trading, settlement, and utilization of securities among financial market participants.

Bank Of England and FCA Release Draft Guidance for Digital Securities Sandbox, Seek Feedback Until May 29

Accompanying the consultation paper, regulators have released draft guidance for firms interested in joining the DSS, outlining the process for scaling activities once authorized for live activity. Additionally, a breakdown of how existing regulations related to securities depositories will transition into ‘Rules’ at various stages of the DSS has been provided.

Feedback on the consultation is open until May 29, 2024. Pending feedback, the regulators plan to finalize guidance for firms and commence DSS applications in the Summer of 2024. Thereafter, the BOE and FCA will scrutinize the feedback and commence accepting applications by the summer, with the first wave of applicants set to participate in the initiative by autumn.

The inception of consultations on the DSS dates back to July 2023 when the UK Treasury first initiated discussions, which led to the U.K. government’s response outlining plans to enact legislation to implement the initiative by November.

Subsequently, new regulations were introduced in December, providing regulatory guidelines for overseeing the sandbox by the nation’s financial watchdogs. These regulations officially came into effect on January 8, as part of the U.K.’s Financial Services and Markets Act 2023.

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