The UK Treasury has launched a new “digital securities sandbox” (DSS) under the Financial Services and Markets Act. The bill will take effect on January 8, 2024, and provides a firewalled financial laboratory where new technologies, such as blockchain, can be validated for use across the broader financial sector. Market infrastructure.
The DSS regulations submitted to Congress today allow eligible financial market entities to participate as “sandbox participants” who can conduct approved activities using developed technologies for a five-year trial period subject to revised regulatory requirements.
Examples of activities cited in the Act include “operating an exchange” and performing one or more functions related to digital securities, such as maintenance, notary services, and settlement. Agencies approved to participate may also perform auxiliary activities directly related to their functions.
Tools available in the sandbox include securities, options, futures, contracts for difference, and rights or interests in those investments. This can be recorded or resolved using the technology under review.
“The impact this has on both investors and issuers is enormous, especially in lower fees for all parties and faster clearing and settlement (and trading).” wrote This is Ryan King, head of regulatory and privacy at blockchain protocol Dusk. “This potentially opens up trading opportunities to a whole new generation of investors.”
He added, “It is a sign that the EU is strengthening and preparing a foundation to welcome (distributed ledger technology) and related technologies, rather than simply tolerate them, as a core part of the financial industry.”
Nearly 20 organizations reportedly submitted comments to the Treasury on the proposal. Ledger InsightsIt also said digital assets issued within the sandbox could be used as collateral outside the sandbox and the holders would not need to be sandbox participants.
Who can participate?
Eligible entities that can apply to become sandbox participants include UK investment exchanges, central securities depositories, multilateral trading facilities and organized trading facilities. In each case, the relevant regulator (the Financial Conduct Authority or the Bank of England) may, on a case-by-case basis, allow the participation of other institutions established in the UK.
The regulations also allow for the participation of certain relevant parties, from third-party service providers to users.
Prospective sandbox participants must apply to the appropriate regulator for approval to participate by providing information about specific activities, technologies, regulatory barriers, and other relevant details. Participants will receive a sandbox approval notice outlining the scope of permitted activities, conditions, reporting requirements, and other obligations if approved.
Regulators may subsequently modify, suspend or cancel a sandbox approval notice under certain circumstances.
The FCA and BoE will supervise sandbox participants during the trial period. The goal of this oversight is to promote effective testing while protecting consumers and financial stability.
regulatory guardrails
Allowing innovative development technologies certainly poses risks, so the regulations provide relief to sandbox participants from certain regulatory requirements. However, regulators are also given the power to impose modified obligations as needs may emerge during testing.
For example, the EU regulation on central securities depositories has been amended to enable sandboxes. And regulators can issue sandbox-related rules or waive certain existing rules.
The Treasury also limits the overall scope of its activities, while regulators have broad powers to oversee testing and intervene if a threat arises.
Treasury will be required to report to Congress on the overall performance of the regulatory sandbox and whether its approach should continue or be modified by January 10, 2028.
The regulator is far from granting blanket permissions, but plans to analyze data and feedback from the trial period to shape potential sustainable policy changes regarding emerging technologies in the UK’s financial market infrastructure.
Editor’s note: This story was drafted using Decrypt AI from sources referenced in the text. fact confirmed Written by Ryan Ozawa.
