Bank of England (BoE) and the Financial Conduct Authority (FCA) have launched a consultation on draft guidance for their Digital Securities Sandbox (DSS), an initiative aimed at allowing participants to test distributed ledger technology (DLT) for trading and settlement of digital securities like shares and bonds.

The sandbox, outlined in a joint consultation and draft guidance released on Wednesday, is set to run for five years and could potentially lead to the establishment of a new regulatory framework for securities settlement.

Successful applicants to the sandbox will have the opportunity to provide securities depository and settlement services, as well as operate a trading venue under modified regulations.

The inaugural group of applicants for the Digital Securities Sandbox is targeted to join in autumn 2024, with the aim of reshaping regulatory approaches by allowing firms to test changes in real-world scenarios before permanent implementation. FCA Executive Director Sheldon Mills expressed optimism about this approach, stating, “We hope this will be a more effective, collaborative and quicker way of delivering regulatory change.”

The initiative, set to last five years with entry constraints, holds potential for establishing permanent regulations governing the trading and settlement of digital assets in the future.

The UK Treasury initiated consultations on the DSS in July 2023, with subsequent plans for legislation implementation by November 2023. New regulations introduced in December 2023 provided guidelines for financial regulators overseeing the sandbox, becoming effective on Jan. 8 under the UK’s Financial Services and Markets Act 2023.

Interested parties can provide feedback on the joint consultation paper until May 29. Following this, the BOE and FCA will review the feedback, aiming to open applications to the DSS by summer 2024, with the first applicants expected to join the initiative in autumn.

The DSS is expected to welcome a diverse range of firms, aiming to maximize learning opportunities and foster innovation within the UK financial system. This inclusive approach could facilitate quicker and more cost-effective methods for trading, settling, and utilizing securities among financial market participants.

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