UK Launches Digital Securities Sandbox

The UK Digital Securities Sandbox (DSS) will take a step forward at the beginning of 2024. The Government has laid secondary legislation before Parliament to create the DSS, which becomes effective on 8 January 2024. The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 (the DSS Regulations) define the scope of the sandbox and empower the Bank of England and the Financial Conduct Authority (FCA) to make further rules to give effect to it.

The DSS Regulations are intended to create a space for UK financial market infrastructures (FMIs) to adopt distributed ledger technology (DLT), including blockchain systems, to support the issuance, trading, and settlement of digital securities. They recognise that DLT infrastructure has the potential to bring these functions together in ways that were not anticipated when the laws for FMIs, such as trading venues and central securities depositories, were written. The powers delegated to the financial regulators include disapplying or modifying certain laws to take account of the new features and possibilities of DLT-based FMIs.

The DSS is comparable to the DLT Pilot Regime in the European Union, but the UK Government is attempting to make it more attractive. By opening the sandbox to a wide range of digital securities, avoiding hard-wired limitations on the sizes of market segments, and allowing a wider range of legislation changes to be considered, it hopes to address the concerns that have limited the impact of the EU regime to date. In its recent response to feedback on its DSS consultation, the Government noted that it had already received nineteen expressions of interest for projects that could be submitted to the DSS. With the laying of the DSS Regulations, it is expected that more firms will come forward with their own initiatives.

It will not be possible to submit applications immediately, as the Bank and the FCA need to use their new powers to change their rules and prepare to supervise projects within the DSS.