HM Treasury Confirms Approach to Digital Securities Sandbox

Following its consultation earlier this year, HM Treasury has published a response to its consultation on the Digital Securities Sandbox, confirming that it will mostly adopt the approach consulted on to establish the DSS. The DSS, which will be the first sandbox to be established using new powers granted by the U.K. Financial Services and Markets Act 2023, is intended to facilitate the use of digital assets in financial markets. The DSS is designed to allow firms to: (i) establish and operate FMIs using digital asset technology; and (ii) perform the activities of central securities depositories and trading venues in relation to existing security classes.

HM Treasury intends to lay before Parliament draft legislation to implement the DSS, which will be run by the Financial Conduct Authority and the Bank of England. The regulators will be consulting soon on their proposed approaches to the DSS, including the application process and proposed rule changes.

The legislation establishing the DSS will, among other things, provide for:

• All relevant assets that are in scope of the regulatory perimeter to be capable of inclusion in the DSS, except for derivatives. A Sandbox Approval Notice will be issued to each Sandbox Entrant, setting out the restrictions applicable to the Entrant, including the types of assets that can be issued, traded or settled on a particular entity. The BoE will have discretion as to whether non-sterling assets should be included in the DSS.
• The scope of the activities, which will be notary, settlement, maintenance and operating a trading venue. Other activities may be conducted in the DSS, provided those are conducted in compliance with existing regulations and rules.
• Sandbox Entrants to be located in the U.K. so that direct supervision by the regulators is possible, however, overseas firms may use or interact with a Sandbox Entrant, provided regulatory requirements are met. There will not, however, be a requirement for Entrants to use English and Welsh law.

Some legislation will be disapplied for entrants in the DSS, however, some of the requirements may be restated in the regulator's rules. For example, much of the Central Securities Depositories Regulation will be disapplied, however, some of those will be replaced by DSS rules to the Bank of England to flexibly manage requirements. It is not intended to disapply the Settlement Finality Regulations. Entrants can request a temporary exemption from the BoE. HM Treasury will be considering how to permanently amend the SFR to provide for digital assets.

The DSS will be established for a period of five years, however, that time period can be extended and permanent amendments to legislation are possible too during that time.

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