The UK Government has received 19 expressions of interest from established financial market infrastructures, banks, and new entrants to take part in its inaugural tests for the Digital Securities Sandbox (DSS).
The DSS will allow organizations to model the operations of a central securities depository and trading venue using distributed ledger technology (DLT) to facilitate digital assets. In July, the Government initiated a consultation to gather market feedback on this initiative, following a 2021 Call for Evidence that explored the application of DLT in financial market infrastructures. Participants noted that the UK’s legislative framework has not been designed to support DLT utilization in these markets.
The Sandbox aims to experiment with the technology through temporary modifications to existing legislation, with the ability to adapt legal frameworks as testing progresses. According to HM Treasury, "After analyzing the responses, the Government intends largely to retain the approach originally outlined in the consultation. This will involve instituting a broad framework for the DSS in legislation while giving regulators the necessary flexibility to manage requirements for participating entities."
The Government plans for all relevant assets currently under the regulatory perimeter, excluding derivatives, to be included in the DSS. However, some consultation respondents criticized the exclusion of unbacked cryptoassets from the sandbox. In response, the Treasury clarified, "There is currently no established regime for cryptoassets that could be amended in the Sandbox. A separate workstream is already underway to establish a regulatory framework for cryptoassets, which will run independently of the DSS."
The Treasury also noted that the FMI Sandbox powers in FSMA 2023 could be a valuable tool in the future for assessing appropriate regulatory innovations related to cryptoassets. The Government will continue to evaluate the need for additional sandboxes to help shape legislation and regulation in the cryptoasset sector.
The full outcome document and the Government’s response to market feedback can be found here.