The UK Digital Securities Sandbox

The Bank of England and the Financial Conduct Authority (FCA) are consulting on the implementation of the Digital Securities Sandbox (DSS) which is set to explore distributed ledger technology (DLT) in the issuance, trading, and settlement of securities. The consultation is aimed at refining the sandbox to encourage developments in market infrastructure, which may influence changes in both financial services and UK corporate law.

Participants and Functions

The DSS will welcome a range of participants, including established central securities depositories (CSDs), operators of trading venues, and new market entrants. Participants will need to be based in the UK and specify the obstacles to new business models that arise from existing laws.

A key innovation is the introduction of Digital Securities Depositories (DSDs), which will handle essential functions traditionally managed by CSDs.

Consultation Focus Areas

The consultation will cover several critical aspects of the DSS:

• Application Process: Steps and requirements for entering the sandbox
• Rule-making Powers: Use and scope of regulatory authority within the sandbox
• Risk Management: Strategies for maintaining financial stability and market integrity
• Supervision and Enforcement: Oversight mechanisms
• Fees: Structure of costs imposed by the Bank of England
• Operational Scope: Limits and regulations for DSD activities within the sandbox

Drawing lessons from the European Union’s DLT Pilot Regime, which has seen limited engagement due to a cautious legislative approach, the DSS aims to be more accommodating. The UK initiative is designed to encourage a broader array of business proposals and signal the government’s readiness to adapt financial regulations permanently, thus stimulating more active participation from the private sector.

Stages of DSS Participation

Participants in the DSS will undergo a structured process:

1. Initial Application: Entry requirements and initial approval
2. Testing: Includes obtaining authorization to operate trading venues and become a DSD
3. Go-Live: Commencing operations within the sandbox
4. Scaling: Expansion of operations and scope within the sandbox
5. Final Transition: Moving to operate under a new regulatory regime outside the sandbox

Regulatory Fees and Next Steps

The consultation outlines expected costs for DSS participants, with fees designed on a cost-recovery basis. Key fees include:

• Application to become a sandbox entrant: £10,000
• Application to be approved to be a DSD: £40,000
• Application to be approved to operate an MTF or OTF: £50,000
• Application for a variation of permission by a Part 4A firm to operate an MTF or OTF: £25,000

Market Limitations

The Bank proposes to set limits for various financial instruments are set to manage risk, including:

• Gilts: 8-13.1 billion pounds
• Corporate Bonds: 17-28 billion pounds
• Asset-Backed Securities: 8-16 billion pounds
• Short-term money market instruments: 4.4-8.8 billion pounds
• Shares in FTSE350 companies: 6% of outstanding shares

The consultation remains open until 29 May 2024, with responses expected in the summer of 2024. The first admissions to the DSS are anticipated in the fall of 2024, marking a significant step forward in the integration of technology and finance within the UK regulatory landscape.