On 30 September 2024, the Bank of England (BoE) and the Financial Conduct Authority (FCA) announced that the Digital Securities Sandbox (DSS) has opened for applications. The DSS is intended to reshape how the BoE and FCA regulate by allowing firms to test legislative changes in real world scenarios before the changes are implemented.

Background

HM Treasury laid a statutory instrument creating the DSS (the DSS Regulations) in December 2023, under powers given to it by the Financial Services and Markets Act 2023. The BoE and FCA launched a joint consultation in April 2024 on their proposed approach to implementing and operating the DSS.

The DSS is intended to give firms the opportunity to explore new technologies in traditional financial markets, such as distributed ledger technology (DLT), a system for storing and managing information distributed across participants in a network. The BoE and FCA believe that the DSS could also lead to a quicker, more effective and collaborative way of delivering regulatory change.

What has been published?

The BoE and FCA have published a joint policy statement on the DSS (FCA PS24/12), setting out their joint approach to safely adopting new technologies in the operation of financial market infrastructures (FMIs). They have also published other documents alongside the policy statement, including final guidance on the operation of the DSS and information for DSS applicants (including the application form).

The joint policy statement

The joint policy statement sets out:

  • Feedback to responses received to the regulators’ April 2024 consultation.
  • A summary of changes made to the policy that was originally proposed in the consultation paper, including to the BoE’s DSS rules, in response to the responses received. The regulators note that they have largely maintained the approach and guidance as consulted on, but some changes have been made to their DSS approach.

Final guidance on the DSS

The final guidance on the operation of the DSS is intended for firms participating in the DSS, including both firms which enter the DSS to become a sandbox entrant and those which interact with these FMIs but do not become sandbox entrants themselves (such as their prospective members). The guidance is intended to be read in conjunction with the requirements under the DSS Regulations and the BoE’s DSS rules instrument.

The guidance includes sections on:

  • The structure of the DSS – including the stages and gates of the DSS, the DSS journey for a hybrid entity, and guidance on the Sandbox Approval Notice (which act as a ‘visa’ for sandbox entrants and outline key information about the firm’s approval to participate in the DSS).
  • Additional guidance on each stage of the DSS.
  • Settlement assets for payments in the DSS.
  • The approach to supervision and enforcement in the DSS.
  • The approach to the use of developing technology.

Application information for DSS applicants

Further information has also been published for firms wishing to apply to the DSS.

A new FCA webpage sets out information including the stages of the DSS for a sandbox entrant, digital securities in scope of the DSS and information on applying. The FCA flags that the DSS will be operational until December 2028 but can be extended by the Government. It also notes that 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. The FCA webpage includes a link to the application form and to applicant supporting notes, as well as information what will happen after a firm submits its application and where to find more information.

The BoE has published a DSS dashboard with relevant information and links for applicants, as well as an introductory webpage which includes a video prepared by Sarah Breeden, Deputy Governor for Financial Stability.

Next steps

Firms wishing to join the DSS are asked to complete an online application process, which is detailed on the regulators’ websites.