BoE and FCA Embrace Dynamic Digital Securities Sandbox
The Bank of England (BoE) and the Financial Conduct Authority (FCA) are introducing the Digital Securities Sandbox (DSS), aimed at modernizing how securities are traded and managed using the blockchain. This new initiative seeks to blend cutting-edge technology with traditional financial systems, ensuring a more efficient and resilient market.
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BoE’s Executive Director, Sashi Mills, in a speech at the London City Week, discussed how the Bank plans to support innovation while maintaining financial stability. She emphasized the importance of integrating new technologies with the existing financial infrastructure.
Traditional Finance Does Not Cut It Anymore
In her speech, Mills pointed out that inefficiencies in the current systems impose financial and operational costs on all market participants, including financial market infrastructure operators, banks, and investors. She stressed that updating these processes requires significant coordination across the market.
Innovation is constantly on a quest to search out value, either through incremental improvements bringing efficiencies, or by taking a radical shift to a brand-new approach. Rapid advancements in technology and connectivity have made it easier than ever to transact in an increasingly wide range of assets.
Sashi Mills
Mills emphasized that the DSS will allow for the integration of trade and post-trade functions, facilitating more precise settlement times and increasing liquidity in a wider range of financial assets. This approach could lower barriers to entry for new providers and enhance the overall resilience of financial markets by reducing dependency on single firms for key services.
There Will Be Flexible Rules and Proactive Regulation
The BoE and FCA are consulting on a new “test” regulatory regime that allows firms to use developing technologies, such as DLT, to issue, trade, and settle securities in a live environment. This regime, known as the Digital Securities Sandbox, will operate under a flexible, more proportionate rulebook. Activities within the DSS will be limited to maintain financial stability and market integrity.
The DSS aims to support innovation in digitally native and tokenized securities in various regulated asset classes. Unregulated assets, such as Bitcoin, are not permitted in the DSS. The Sandbox will help regulators determine how the existing regime for trading and settling securities needs to be amended to support new technologies. For the first time, operators can combine settlement activities with those of a trading venue in the same legal entity.
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This approach allows for a more flexible rulebook, enabling regulators to apply a proportionate approach to regulation and make changes based on observations from the DSS. It also helps manage financial stability risks while facilitating new ways of doing things and maximizing the benefits of innovation.
BoE Wants To Ensure Financial Stability for Investors
Mills said regulators face a challenge in protecting financial stability while supporting innovation. The use of the distributed ledger at scale in the financial system is untested, meaning the market disruption risk is higher than established practices. To reduce these risks, firms must demonstrate to regulators that their systems can support live activity in the DSS. Those who pass this test can operate as a Digital Securities Depository (DSD).
The Bank will impose limits on the value of securities that can be issued in the Sandbox. This will be a sandbox-wide limit, or capacity, with firm-specific limits distributed across participating Digital Securities Depositories.
Sasha Mills
She explained that this approach to firm-specific limits is expected to accelerate innovation. While activity is limited, firms can engage in “live” activity much earlier than they would if pursuing authorizations through usual channels. The assets held in the DSS can interact with the wider financial system, allowing financial market participants to use DSDs similarly to how they use central securities depositories (CSDs) today.
Cryptopolitan reporting by Jai Hamid
