UK plans to launch Digital Securities Sandbox in 2024

The U.K. Financial Conduct Authority (FCA), under the instruction of HM Treasury, plans to launch a second digital sandbox “to do new things with digital securities” in Q1 2024, according to the financial watchdog’s head of capital markets, Helen Boyd.

Speaking at the CCData Digital Asset Summit on October 3, Boyd said the new sandbox pilot would explore what was possible with tokenized instruments, acting more as an infrastructure sandbox in contrast to its current “innovation sandbox,” which was launched on August 1.

“It’s a completely new way of making regulation,” Boyd said. “In the past, we’ve tended to wait for activity to come along and regulate it.”

The Digital Securities Sandbox (DSS) is the result of a consultation launched by His Majesty’s Treasury in July, which ended August 22. As the U.K. top financial markets regulator, the FCA will oversee the sandbox.

“The DSS will facilitate the testing and adoption of digital securities across financial markets,” the Treasury’s consultation read. “Through the DSS, industry will be able to set up financial market infrastructures that utilise digital asset technology, which can perform a number of activities in relation to digital securities under a temporarily modified legislative and regulatory framework.”

UK Treasury Digital Securities Sandbox

In July 2023, the Treasury began consulting on the framework for the DSS, its first financial markets infrastructure (FMI) sandbox. The DSS consultation set out how institutions would be able to apply to establish and operate digital securities depositories and/or trading venues under a modified temporary legislative framework.

The three primary objectives of the DSS are:

1.Testing how existing U.K. legislation needs to change to accommodate digital asset technology;

2.Enabling the financial sector to test and adopt digital asset technology in FMIs;

3.And testing the use of FMI sandboxes as a policymaking concept.

The activities proposed to be in the scope of the DSS were essentially those functions currently performed by central securities depositories, such as the operation of a trading venue notary, and settlement and maintenance services.

The sandbox is intended to run for five years, with the possibility of extension, and the Treasury hopes for temporary modifications to eventually be made permanent, should the sandbox prove a success.