On 22 November 2023, HM Treasury (HMT) published its response to the July 2023 consultation on the Digital Securities Sandbox (DSS). The response sets out the Government’s final approach to implementing the DSS, which will facilitate the use of digital assets in financial markets.

The DSS will be the first Financial Market Infrastructure (FMI) Sandbox set up under the powers given to the Government by the Financial Services and Markets Act 2023 (FSMA 2023). It will be run by the Bank of England and the FCA and is intended to help facilitate the adoption of digital asset technology in UK financial markets, by enabling participating entities to have access to modifications to the UK legislative and regulatory framework in cases where there are currently barriers to conducting digital assets activity. Participants will be subject to limits on their activity and close supervision by the regulators. HMT notes that the DSS will not be mandatory, and where a proposal can already be accommodated within existing legislation firms will be expected to use existing authorisation processes.

The consultation set out and sought feedback on the key features of the DSS, as well as further policy and legal issues around the utilisation of digital securities. The response document summarises the feedback from industry on the consultation and provides HMT’s response to the issues raised.

In the response, HMT notes that the fundamental design of the DSS was well received, with feedback praising the emphasis on facilitating innovation without compromising on regulatory outcomes. Responses emphasised that while the starting point is existing legislation, the flexibility to change requirements in response to novel use cases through the DSS was also important.

Specific aspects of the DSS proposal were also highlighted in responses, and there were calls for further clarity in various areas including the application process, the management of limits set in the DSS, the interaction of activities in the DSS with activities outside the DSS, and the process for exiting the DSS. HMT confirms that in most cases these details will be provided by the regulators “in due course”.

There were also responses to the proposed changes to legislation to be made through the DSS. HMT confirms that it will work with the regulators and industry to identify any further legislative provisions that need to be brought into scope, and if necessary can facilitate this via further statutory instruments amending the DSS. Under the powers in FSMA 2023, the Government can also set up further FMI Sandboxes, if this is desirable.

HMT notes that legislation implementing the DSS will be laid before Parliament in due course.