The Digital Securities Sandbox (DSS)
Following its launch in December 2023, and the joint Bank of England and FCA Consultation Paper in April 2024, the DSS is now open for applications. The DSS is an FCA initiative launched in December 2023 to enable and support financial innovation, specifically designed for digital securities and related technologies, such as blockchain, tokenisation and distributed ledger technology (DLT). The DSS is separate from the Regulatory Sandbox, which has a more general focus in supporting a wide variety of innovations across the entire financial services sector. The DSS will allow firms to use developing technology, in the issuance, trading and settlement of securities such as shares and bonds.
The FCA has recognised that developing technologies have the potential to make markets more efficient, transparent and resilient. By testing and creating the right conditions for investment, innovation and sustainable growth, the DSS aims to be part of the strategy to become a global leader in blockchain and digital assets.
Firms that successfully apply for the DSS will be able to operate under a set of rules and regulations that have been modified to facilitate this. The DSS will last for five years and help the FCA and BOE design a permanent technology friendly regime for the securities market.
Goals of the DSS
The DSS aims to support the development of digital financial market infrastructure (FMI) whilst ensuring that innovations meet regulatory standards.
More specifically, there are three main objectives of the DSS:
- To facilitate innovation to promote a safe, sustainable and efficient financial system;
- To protect financial stability; and
- To protect market integrity.
The DSS will allow Regulators to determine how the existing regime for the issuance, trading and settlement of securities would need to be permanently amended to support the use of new technologies. The application of new technology such as distributed ledgers could materially improve the efficiency of ‘post-trade’ processes that take place after a trade is executed. By making these processes 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.
Digital Securities and the DSS
In-scope digital securities include:
- Transferable securities (e.g. equities, sovereign and corporate debt)
- Units in Collective investment schemes (fund units)
- Money market instruments (e.g. commercial paper and certificates of deposit)
- Emissions allowances
Out of scope digital securities include:
- Derivative contract settlement (derivative contracts referring to DSS assets are permitted if settlement is outside the DSS)
- Unbacked cryptoassets (e.g. Bitcoin and Ether)
Stages of the DSS for new entries
- Initial applications to the DSS and identifying eligible firms to join the DSS
- Testing stage and engagement with regulatory bodies to operate a trading venue or be a Digital Securities Depository (DSD), aimed at Sandbox entrants
- DSD/Authorised operators of a trading venue, carrying out live business under initial limits
- DSD/Authorised operators of a trading venue, continuing the business with a path to full authorisation for DSDs
- Depending on the outcome of the permanence of the new regime, firms will gain full authorisation to operate outside the DSS for DSDs
DSS Timeline
The DSS will be operational until December 2028 but may be further extended by the government. The window for applying to join the DSS is expected to close around March 2027, so that the Regulators and firms inside the DSS can prepare for a transition to a possible new permanent regime, provided the new technologies are implemented successfully.
Next steps
Firms who want to submit an initial application to become a DSS entrant should:
- Read the FCA guidance on the operation of the DSS
- Familiarise themselves with the PS24/12 which sets out the FCA and BOE final policy approach
- Be aware of the joint FCA and BoE DCC Applicant supporting notes
- Complete the FCA online application process
How Complyport can help
Our experienced team of Consultants is dedicated to ensuring your company meets the latest regulatory standards and best practices, and can support your firm in the following ways:
- DSS Application management: preparing and overseeing your DSS application process, including the preparation of supporting documentation
- Regulatory guidance: Offering regulatory guidance to firms dealing with digital securities
- Business Plan/Strategy review and support
- Governance arrangements and controls evaluation: Creating the necessary bespoke policies and procedures and supporting the implementation of existing policies and procedures
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