Sarah Breeden, Deputy Governor for Financial Stability, introduces the DSS giving a high-level summary of what it is and why it’s an exciting development for the financial system, the Bank of England and the Financial Conduct Authority (FCA).
The DSS is a regulated live environment that has been created to explore how developing technologies could be used by firms to undertake the activities of notary, maintenance and settlement for financial securities either alone, or together with the operation of a trading venue. For example, the DSS will facilitate the issuance, trading and settlement of digital securities in the UK on distributed, programmable ledgers. These activities will need to comply with regulation by the FCA and the Bank.
The Bank and the FCA operate the DSS, pursuing three overarching aims:
When developing the DSS, a guiding principle has been to ensure the regulatory guardrails put in place are proportionate to the risks posed by business models. This is to ensure regulation does not inhibit innovation to protect financial stability. There are three main examples of this:
These innovative technologies are untested in important financial markets at significant scale in the UK and globally. Consequently, live activity in the DSS will be subject to specific limits that have been carefully calibrated based on market analysis for the different asset types in scope of the DSS.
A modified legal regime, including a flexible set of rules introduced by the Bank, will be in place for the duration of the DSS. This allows the Bank and the FCA to remove legal obstacles and barriers that prevent the use of developing technologies and to adapt those in light of the activities in the Sandbox.
The DSS has been designed so that participants can scale their business with access to higher limits as they demonstrate their compliance with the regulatory requirements at each gate (see 'Stages and gates of the DSS for a sandbox entrant' table below). At the end of the DSS, the intention is that interested participants will have the opportunity to transition to a new permanent regime if the technology is successfully adopted. The experience inside the DSS and feedback from the participants will help shape that regime.
The DSS is due to run until 8 January 2029 but may be extended by HM Treasury through legislation if more time is necessary to transition to a new regulatory regime.
The DSS has been created to encourage innovation in financial market infrastructure, most notably through using new technologies such as Distributed Ledger Technology (DLT).
The application of such technology could improve the efficiency of ‘post-trade’ processes. By making them faster and cheaper, the adoption of these technologies could, if successfully implemented, lead to material savings across financial market participants, such as 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.
To realise these benefits, 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.
|
Stage |
Purpose |
Legal designation |
|---|---|---|
| Initial application stage | Identify firms eligible to join the DSS | None |
Gate 1 |
||
| Testing stage | Testing stage and engagement with regulators to operate a trading venue or to be a DSD | Sandbox entrant |
Gate 2 |
||
| Go-live stage | Ability to carry out live business under initial limits | DSD/ authorised operator of a trading venue |
Gate 3 |
||
| Scaling stage | Scaling the business with a glidepath to full authorisation of DSDs | DSD/ authorised operator of a trading venue |
Gate 4 |
||
| Possible new permanent regime | Full authorisation to operate outside the DSS for DSDs | To be decided/ new category of FMI |
Activities taking place in the DSS after Gate 2 will be 'live'. In other words, this will involve issuing, trading and settling real digital securities. Those securities can be used in the same way as traditional ones. For example, firms will be able to use the securities issued inside the sandbox in repurchase agreements or write derivative contracts based on securities in the DSS as they normally would any other.
The following financial instruments are examples of what could be issued and traded in the DSS:
The trading and settlement of derivative contracts and of ‘unbacked cryptocurrencies’ such as Bitcoin are not in the scope of the DSS.