The Bank of England (BoE) and the FCA have published a joint consultation paper outlining their proposals to implement and operate the Digital Securities Sandbox (DSS).

The DSS will allow firms that successfully apply to use technology such as distributed ledger technology (DLT) to issue, trade and settle securities under a set of modified rules and regulations. The DSS will operate for a period of five years, allowing regulators to design a permanent technology friendly regime for the securities market.

The consultation paper outlines the regulators’ proposed approach to:

  • The implementation and operation of the DSS;
  • The application process;
  • The use of rule-making powers;
  • Managing financial stability and market integrity risks in the DSS; and
  • Supervision and enforcement.

The BoE and the FCA will pursue three overarching aims in operating the DSS:

  • Facilitating innovation to promote a safe, sustainable and efficient financial system;
  • Protecting financial stability; and
  • Protecting market integrity and cleanliness.

Financial instruments that could be issued and traded in the DSS include equities, bonds, money market instruments and units in collective investment undertakings, however the trading and settlement of derivative contracts and ‘unbacked cryptocurrencies’ such as Bitcoin will not be in scope.

The regulators’ approach will allow financial market participants to interact with firms in the DSS as normal while benefitting from the new technology.  However, limits will be imposed on the value of securities that can be issued in the DSS. 

Sandbox entrants will move through a series of gates while in the DSS as they progress from one stage to the next, with increasing amounts of permitted activity as firms move through.  The BoE state that this glidepath will enable firms to eventually graduate from the DSS to a possible new regime if they meet the relevant standards.

The consultation highlights that the application of new technology could materially improve the efficiency of ‘post-trade’ processes, leading to material savings across financial market participants, such as pension funds, investment firms and banks.

The closing date for responses to the consultation paper is 29 May 2024.  A response from the regulators is expected this Summer, with the first cohort of sandbox entrants expected to enter the DSS in Autumn 2024.