Regulators open Digital Securities Sandbox

The Bank of England (BoE) and FCA opened the Digital Securities Sandbox (DSS) on 30 September 2024. It is the first Financial Market Infrastructure (FMI) sandbox created under the FMI sandbox powers conferred on HM Treasury by the Financial Services and Markets Act (FSMA) 2023.

The purpose of the DSS is to facilitate the use of developing technology, such as distributed ledger technology (DLT), in the issuance, trading and settlement of securities. It also aims to drive a quicker, more effective and collaborative way of delivering regulatory change.

The DSS is open to firms of all sizes and all stages of development, as long as they are legally established in the UK, undertake FMI activities in securities set out in the DSS, and have identified legal or regulatory barriers to deploying a technology. Participating firms could be existing financial institutions, which are already authorised or recognised under current regulation, or new entrants to the market.

The authorities also published guidance on the operation of the DSS, and a final policy statement.

What does this mean?

The DSS gives firms the opportunity to explore new technologies in traditional financial markets, including DLT. According to the regulators, DLT has the potential to improve efficiency and reduce costs in wholesale markets, benefitting industry and investors.

The FCA and BoE will work together to operate the DSS. The sandbox will have three overarching aims: 1) facilitate innovation to promote a safe, sustainable and efficient financial system, 2) protect financial stability, and 3) protect market integrity and cleanliness.

The DSS is divided into a series of gates for sandbox entrants to move through, providing a path to progress from one stage to the next. The level of permitted activity increases with each stage.

Stage	Purpose	Legal designation
Initial application	Authorities identify firms eligible to join the DSS.	None
Gate 1
Testing	Testing stage and engagement with regulators to operate a trading venue or to be a Digital Securities Depository (DSD).	Sandbox entrant
Gate 2
Go live	Firms carry out live business under initial limits.	DSD/authorised operator of a trading venue
Gate 3
Scaling	Firms grow the business with a path to full authorisation for DSDs.	DSD/authorised operator of a trading venue
Gate 4
Possible new permanent regime	Firms gain full authorisation to operate outside the DSS for DSDs.	To be decided/new category of FMI

Firms will be able to undertake live business after Gate 2, including supporting the issuance, trading and settling of digital securities, in broadly the same way as traditional securities. The financial instruments in the DSS could, for instance, include equities, corporate and government bonds, money market instruments, units in collective investment undertakings (fund units), and emissions allowances. Activities in relation to cryptoassets which do not qualify as financial instruments, including stablecoins, are not in scope of the DSS.

The policy statement makes a number of amendments to the original proposals in April 2024. These include:

Extending the scope of the DSS to include non-GBP denominated assets.
Adopting a more flexible approach to setting firm-specific limits at the go-live stage, by adopting limit ranges rather than a fixed go-live limit.
Adding the option of a third Gate 3 progress review window.
Reducing the minimum capital requirement for a DSD from nine months to six months of operating expenses.

What do firms need to do?

Firms should intensify their focus on exploring scope to use technologies such as DLT to improve the efficiency of their operations, as the DSS will support deployment across the FS sector.

Firms intending to participate should carefully consider the eligibility criteria and regulatory requirements, as outlined in the final guidance and policy statement.

The wider financial ecosystem should consider ways to interact with sandbox entrants participating in the DSS, to support the intended permanent outcomes.

A significant number of FS firms are already or are planning to operationalise emerging technologies to better support financial markets. The benefits include improved efficiency in trading and settlement, increased automation, as well as faster, cheaper and simpler ways to conduct financial and operational activities.

The DSS enables market participants to go further and deeper in exploring and deploying the technologies in a regulated live environment.

Those firms choosing to embrace the opportunities now, could establish a long-lasting competitive edge through an early adoption, increased credentials in the market.

The regulators' objectives are to ensure the regulatory regime supports the deployment of emerging technologies in a sustainable manner. All relevant firms should consider participating in or otherwise supporting the DSS efforts, as well as consider how the future regulatory changes will impact their existing business operations.

Next steps

The DSS will be operational until December 2028, and can be extended by the Government.

The window for applying to join the DSS is expected to close around March 2027, so that the regulators and firms inside the DSS can prepare for a transition to a possible new permanent regime. This is provided that the new technologies are implemented successfully.