The legislative framework for the UK’s Digital Securities Sandbox (DSS) came into effect today, a testing environment for digital assets relating to financial market infrastructure (FMI).
This is a significant move for UK fintech, banking and payments stakeholders, and will play a central role in the government’s plans to turn the UK into a digital hub for financial innovation.
For example, testing of digital solutions relating to crypto assets is a key objective of the DSS. Prior to launch, the programme had been subject to a Treasury consultation, which closed on 11 July 2023.
The consultation outcomes were subsequently released on 22 November 2023, and was amended on 20 December when legislation was laid before Parliament. So what exactly do the regulations, part of the Financial Services and Markets Act 2023 (FSMA 2023), entail?
As mentioned above, the law comes into effect today (8 January 2024) and will remain in effect until 8 January 2029. Top down, the Treasury has chosen the Bank of England (BofE) and Financial Conduct Authority (FCA) as the ‘appropriate regulator’ for the sandbox.
These institutions have been tasked with pursuing “such steps they consider appropriate to co-operate with each other in connection with the operation and supervision of the DSS”, including a possible memorandum of understanding (MoU).
Such an MoU could encompass granting or varying of an approval of a sandbox entrant’s participation in the FMI sandbox arrangements, the making of rules, exercise of enforcement powers and furtherance of the DSS’ purposes.
Financial activities covered under the scope of the DSS include money-market instruments, units in collective investment projects and transferable securities, but not derivatives.
Meanwhile, participation in the DSS is not mandatory, but only UK-based organisations will be able to apply to join the platform as a ‘Sandbox Entrant’. Applications will be accessed, and either approved or rejected, by the FCA and BofE.
It is hoped that the launch of the DSS, which occurred last August overseen by the FCA and is now governed by the new legislative framework, will play a significant role in driving the UK’s financial sector forward.
As mentioned above, this has been a key goal of the UK government of late, particularly under the premiership of Prime Minister Rishi Sunak, an economist by trade and a keen proponent of the country’s finance and technology sectors.
These objectives were underscored by Chancellor Jeremy Hunt in the Autumn Budget last year, with a £500m investment pledged in technological development, and it is likely such plans will be reiterated in the March statement.
However, the DSS legislation is also significant in that it marks an expansion of the Treasury’s powers under FSMA 2023. The Treasury will be required to report the progress, impact and effectiveness of the DSS to parliament in 2028, one year before the FMS expires.
