Having launched the country’s first digital securities sandbox (DSS) for the first time at the beginning of this year, UK regulators are now beginning a consultation process on ways to improve the operational process of harnessing distributed ledger technology (DLT).
The Bank of England (BoE) and the Financial Conduct Authority (FCA) laid out proposals of the DSS which detailed the implementation of an operational process of running the digital platform, as well as other application processes to enter the DSS.
Both regulatory parties will also inform incumbent respondents on the use of rule-making powers within the DSS and how to approach managing financial stability and integrity risks, along with overall supervision and enforcement of regulations.
The DSS was officially confirmed by the UK under the Financial Services and Markets Act 2023 in July 2023. Its official launch occurred later on in January 2024, enabling interested companies to sign up and seek approval from both the FCA and BoE before entering the digital space.
Geared primarily towards small and medium-sized enterprises, the digital sandbox aims to provide additional benefits, such as robust data security protection, high-quality datasets and APIs and an observation deck that will enable businesses to observe in-flight tests.
A BoE statement on the announcement of the consultation period, said: “In the evolving landscape of global finance, the intersection of traditional financial systems with digital innovations presents both opportunities and new challenges.
The use of new and innovative technologies in global finance can create a more efficient, competitive, and robust financial system that helps facilitate economic growth.
“The adoption of new technologies has a long history of transforming financial markets in the UK. The transformation from paper-based exchanges to digital trading platforms revolutionised how securities are traded.
“Today, investors have a growing choice of trading venues, many of which employ innovative technology to streamline their services and therefore increase the efficiency and integrity of these markets.”
The BoE also revealed that the consultation process will affect interested parties intending to apply to enter the DSS, or those which have already been approved.
The central bank also noted that this process would also concern those who wish to engage in the DSS but not become one themselves, which applies to those offering custody services for digital securities that are recorded, traded and settled on financial modelling institutes.
Those parties interested in offering feedback on the first several months of DSS operations will firstly need to apply to become a sandbox entrant, before complying with existing regulatory requirements.
The consultation period will close on 29 May 2024 with both the BoE and FCA hoping to affirm that this eight week period will not represent permanent regulatory guidelines, rather, the ability to converse with parties to update and improve upon those to ensure that the digital environment has long-lasting potential.
The UK has been accelerating its plans to become a ‘digital hub’ for technological innovation, both in its fintech and crypto sectors.
The DSS is one element of this roadmap that will look to bring companies together to harness and tap into DLT. There is a long-term goal in mind in the development of the tokenisation of securities and financial assets which could revolutionise the UK financial sector.
Upon the launch of the DSS last January, Dr. Alisa DiCaprio, Chief Economist at R3, spoke to Payment Expert, stating that the DSS was a “significant milestone” for increased adoption of DLT and is symbolic of the UK’s commitment into innovating and exploring new methods of its financial system.
She said: “By allowing firms to experiment with DLT within a regulated framework, the FMI sandbox will serve as a stepping stone to a more collaborative, open, and trusted digital economy.
“Over the next five years, DLT is predicted to help tokenize an estimated $5 trillion in assets. The government must continue to recognise the role that this technology will play in maintaining the competitiveness of the City.”
