Regulations for the UK’s first Digital Securities Sandbox (DSS) will come into force on 8 January 2024, enabling financial market infrastructures and new entrants to experiment with developing technologies in a more flexible legal and regulatory environment than the existing framework.
To date, the government says it has received 19 expressions of interest from financial market infrastructures, banks and new entrants to participate in inaugural tests of the sandbox, which is designed to enable firms to model the operations of a central securities depository and trading venue using technologies including distributed ledger technology (DLT) to accommodate digital assets.
The regulations will be in place until 8 January 2029, although a year before this the Treasury must report to Parliament on the efficiency and effectiveness of the sandbox arrangements, and whether it proposes to make any permanent changes to law to allow sandbox projects to continue. The Treasury is empowered to propose such changes under the UK Financial Services and Markets Act 2023 (FSMA 2023).
Only UK entities can participate in the sandbox, with the submission of applications limited to authorised multi-lateral trading facilities and organised trading facilities, recognised central securities depositories, recognised investment exchanges, and other persons permitted to participate by the regulators. Activities must involve the use of developing technology, which includes, but is not limited to, distributed ledger technology, in a way that is not permitted under the general legal and regulatory framework.
The legislative framework for the sandbox follows a government consultation in July 2023 to assess market feedback on the initiative. This followed a call for evidence in 2021 to examine the application of DLT for financial market infrastructures. A key issue identified by market participants at the time was that the UK legislative framework was not built to support the use of DLT in financial markets, hence the need to make modifications to existing legislation to facilitate the sandbox.
There is currently no established regime for crypto assets that could be amended in the sandbox, although a separate workstream is underway to put in place a regulatory framework for these assets. According to the Treasury: “The sandbox powers in FSMA 2023 could potentially be a helpful mechanism in future for assessing appropriate regulatory innovation in relation to crypto assets. The Government will continue to assess the desirability of further sandboxes to help inform the development of legislation and regulation in the crypto asset space.”
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