HM Treasury Consults on First Financial Market Infrastructure Sandbox – the Digital Securities Sandbox

HM Treasury has published a consultation on the establishment of a financial market infrastructure sandbox, known as the Digital Securities Sandbox. The sandbox will be established using new powers granted by the U.K. Financial Services and Markets Act 2023 (which we discuss in our client note, "A Boost for UK Financial Services"), empowering HM Treasury to set up individual FMI sandboxes. The sandboxes are designed to enhance understanding of the use cases for emerging digital asset technologies, including distributed ledger technology. HM Treasury can modify or disapply legislation and rules within the sandbox to permit different technologies to be tested that would not be possible under the existing legislative and regulatory framework, with the potential to make permanent changes to legislation based on the findings of the sandbox.

The DSS is the first FMI sandbox to be established by HM Treasury. It 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 (which are expected to include a subset of regulated financial instruments that may be digitally native issuances (e.g., digital bonds and equities) or digital representations of existing securities (e.g., digital versions of money market instruments)). The Bank of England and U.K. Financial Conduct Authority will establish the application forms and process for accepting applications into the sandbox. The DSS is expected to last up to five years, with the possibility for extension. HM Treasury will be able to implement changes to legislation throughout this time.

Responses to HM Treasury's consultation may be submitted until August 22, 2023.

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