The Digital Securities Sandbox, set up by Bank of England and Financial Conduct Authority of the UK, can be a gamechanger in the securities market domain:
The UK’s financial regulators, the Bank of England and the Financial Conduct Authority, have recently launched Digital Securities Sandbox, or DSS, a service designed to support a firm’s innovations and ideas around digital assets and devise ways to apply them within the traditional financial services.
Both the Bank of England and the FCA had initiated a long consultation process before the formal launch of the sandbox, which is also intended to provide a platform for testing legislative changes around digital securities and how they may affect the market. The 2 entities said firms working in the financial services market can participate in the sandbox. They also said the sandbox will allow participants to use developing technologies, like DLT, to undertake the activities traditionally associated with Central Securities Depositories and trading venues.
3 FOCUS AREAS
The 3 focus areas for the sandbox will be facilitating innovation to promote a safe, sustainable, and efficient financial system, protecting financial stability, and protecting market integrity and cleanliness.
The sandbox is intended as a temporary supervisory regime facilitating fintech firms to carry out specific activities within certain parameters and determine whether these activities can be incorporated into the current regulatory regime.
One of the main aims of the sandbox is to develop technologies, application of which could improve the efficiency of ‘post-trade’ processes. The successful adoption of these technologies could lead to material savings across financial market participants, like pension funds, investment firms and banks. For example, companies that use capital markets to raise finance, may benefit from more efficient and ‘deeper’ capital markets, where more investor participation could reduce the ease and costs of raising finance through them.
Besides, market participants will be able to interact with firms in the sandbox in the same way as with any regulated firm providing these services. Users of those services will, however, need to be mindful of the potential risks of doing so given sandbox entrants will not immediately be required to meet the same standards of resilience as a fully authorised financial market infrastructure.
HOW THE IDEA WAS BORN
The genesis of the sandbox is like this: The UK Treasury, in 2023, initiated a consultation process on its powers to modify or cancel existing regulations to test the activities of the financial market infrastructures and whether these can be modified in relation to digital securities. It then gave the necessary go-ahead to the Bank of England and the FCA to make, modify and disapply rules and technical standards in the context of a sandbox that can test the new technologies. Both the regulators then carried out a series of consultations on creating and operationalizing the sandbox, which drew a lot of interest from firms.
It has been decided that the
DSS participants will be among 3 business models:
1. Firms undertaking notary, settlement and maintenance CSD activities, or Digital Securities Depositories;
2. Firms operating a trading venue; and
3. Firms providing both of the above
The eligibility for a DSS participant are:
1. Be a UK-based entity (not a branch)
2. Conduct activities and deal in assets in such a way that is in scope of the DSS.
3. Certify that they face potential regulatory barriers or obstacles to conducting their activities outside the DSS.
The sandbox is in different stages, with a series of ‘gates’ for entrants to move through as their permitted activity increases at each stage. As they satisfy the supervisors on the robustness of their systems, limits on the volume of assets allowed in the sandbox will be raised and then removed altogether. Providing a clear roadmap to scaling sandbox activity should give potential participants more confidence that their efforts and investments will not be wasted.
As the sandbox is now officially open, in the next few months, eligible firms will enter the DSS and start to move through the gates and stages.
The application window is expected to close in March 2027, while the sandbox will be operational until December 2028, but may be extended.
A GOLD STANDARD
Financial market experts feel that the proactive stance of the UK government and the country’s regulators through initiatives like the sandbox is a major step forward. They believe there would be a comprehensive, gold-standard regulatory regime in the country in future, which not only protects the market but also makes the country an attractive, secure destination for international institutions to engage in digital asset and tokenization activities.
They are also of the view that if the sandbox is able to help the country’s regulators to have a regulated infrastructure for tokenized assets, the advantages for the city of London could be enormous. The benefits of tokenization are seen as improved collateral mobility, removed or minimized counterparty risk, settlement on demand and enhanced functionality via smart contracts and these can help the financial business from world over to migrate to the UK.
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