The Bank of England and the UK Financial Conduct Authority (FCA) have unveiled a new initiative called the Digital Securities Sandbox (DSS) on April 3. The purpose of this framework is to support the use of emerging technologies like distributed ledger technology (DLT) in the issuance, trading, and settlement of financial securities. Participating firms will have the opportunity to explore innovative technological applications within a structured regulatory environment.
The launch of the DSS represents a step towards integrating cutting-edge technologies into the financial market infrastructure in the UK, ultimately aiming for a more efficient and resilient financial system.
The DSS, designed as a five-year program, will allow firms to take on roles typically associated with central securities depositories, such as issuing, maintaining, and settling securities. This framework also allows for the integration of these roles with trading venue functionalities, potentially leading to the development of new business models in the financial sector.
With the objectives of encouraging innovation, maintaining financial stability, and upholding market integrity, the DSS covers a variety of financial instruments, excluding derivative contracts and unbacked digital assets like Bitcoin. The initiative is expected to bring new technological solutions into the financial markets, enabling seamless interaction between DSS participants and other market players.
To address risks to financial stability, the Bank of England plans to implement limits on the value of securities that can be issued within the sandbox. The DSS will introduce a phased structure of permitted activities to gradually expand the scope of operations for participating firms.
The sandbox is anticipated to deliver significant benefits to the financial system by enhancing the efficiency of post-trade processes, potentially leading to cost reductions for various market participants. The Bank of England and FCA are currently seeking input on the proposed operation and regulatory framework of the DSS through a consultation period targeted at potential infrastructure providers and stakeholders interested in the initiative.
After the consultation period, the central bank and FCA will issue a response and finalize the guidelines and regulations for the DSS, with plans to start accepting applications in the summer of this year.
