The Bank of England (BoE) and the UK Financial Conduct Authority (FCA) have announced the launch of the Digital effects sandbox (DSS) on April 3.
The new framework aims to facilitate the use of emerging technologies, such as distributed ledger technology (DLT), in the issuance, trading and settlement of financial securities. It will enable participating companies to explore innovative technological applications within a structured regulatory environment.
The initiative represents an effort by UK financial regulators to integrate advanced technologies into financial market infrastructure, with the aim of creating a more efficient and resilient financial system.
Digital finance
The DSS is designed as a five-year program and is intended to allow companies to perform functions traditionally associated with central securities depositories, including the issuance, servicing and settlement of securities.
Furthermore, the framework enables the integration of these roles with trading platform functionalities, potentially leading to the creation of new business models in the financial sector.
The DSS was established with three main objectives: encouraging innovation in the financial system, maintaining financial stability and maintaining market integrity.
It covers a variety of financial instruments such as shares, bonds, money market instruments and units in collective investment undertakings – with the exception of trading and settlement of derivative contracts and unsecured digital assets such as Bitcoin.
The initiative aims to seamlessly integrate new technological solutions into the financial markets, enabling regular interaction between DSS participants and other market players. Securities issued within the DSS are intended to be used in conventional financial transactions, including as collateral and in derivative contracts, subject to existing regulatory standards.
Limit risks
To limit risks to financial stability, the Bank of England plans to impose limits on the value of securities that can be issued within the DSS. This approach reflects the experimental nature of these technologies in key financial contexts.
The DSS will introduce a phased structure of permitted activities, with each phase intended to gradually increase the scope of permitted activities for participating companies.
The sandbox is expected to bring significant benefits to the financial system, especially in improving the efficiency of post-trade processes. This could lead to significant cost savings for various market parties, including pension funds, investment firms and banks.
The Bank and FCA have initiated a consultation period to gather input on the proposed operation and regulatory framework of the DSS. The consultation is aimed at potential infrastructure providers and stakeholders interested in the DSS, including firms, law firms and industry associations.
Following the consultation, the central bank and FCA will issue a response and finalize the guidelines and regulations for the DSS, with plans to accept applications from summer this year.