Consultation on the Digital Securities Sandbox

Following the launch of a consultation on a Digital Securities Sandbox (DSS) in July this year, the HM Treasury has now published a corresponding response paper. In this response paper, the Treasury outlines the feedback it has received to its consultation and presents its way forward in this matter. To recall, the sandbox will allow companies to provide trading and settlement infrastructures for digital securities and the operation of a trading venue for such securities
Generally speaking, respondent strongly welcomed the proposed design of the sandbox and saw the DSS as a great opportunity to experiment in this sector to stay abreast of technological developments. It shall be mentioned though, that there were some differing views about issues like assets to be covered by the DSS (e.g. investment fund units or sovereign debt), the denomination of assets, or the scope of activities to be included in the DSS. Wherever relevant for the final design, we will point out these comments of respondents. The following summary briefly presents the key finalized features of the sandbox.
#### Key features of the sandbox:
– As proposed, the sandbox will initially run for five years with the option to be extended.
– Also as proposed, the sandbox will include debt, equity and money market instruments which can be either „digitally native“ issuances or „digital representations of existing securities“. In view of the responses received by commenters, the HM Treasury will, however, change the wording so as to allow for more flexibility in this matter (e.g. for the inclusion of fund shares or equity-like instruments). Cryptocurrencies will be explicitly excluded from the sandbox.
– Also, unlike proposed, the Treasury will provide that the DSS can include instruments denominated in currencies other than sterling in the DSS, although at the beginning, the Treasury does not expect to see digital FMIs in other currencies.
– Just like suggested, there will be a limit on the volume of transactions that is partially flexible in nature: the number of securities of particular asset classes will be restricted and there will be a limit applying to an organization under the DLT sandbox, which is flexible due to being based on an entities size, activities, and sandbox performance. The exact limits will be set in due course in form of regulatory guidance.
– The DSS will only be available to UK-based firms. However, in view of the responses received, groups may also apply to the DSS (including foreign groups) and it will not be prohibited for non-UK entities to interact with DSS infrastructures both as participants and by offering ancillary services.
– Entities seeking to operate a trading venue within the DSS will need to possess an existing Part 4A Financial Services and Markets Act (FSMA) permission or qualify for an exemption. Alternatively, they can apply for authorization as an investment firm operating a Multilateral Trading Facility (MTF) or Organized Trading Facility (OTF) through the standard regulatory procedures.
– Finally, as proposed, the sandbox will NOT be accessible for retail investors.
#### Way forward
To implement the sandbox, the Treasury will lay a new Statutory Instrument, which – among others – will
– disapply certain rules of the retained Central Securities Depositories Regulation (UK CSDR) and
– modify the Companies Act 2006 and Uncertificated Securities Regulations.
The HM Treasury will NOT make any changes to the retained Markets in Financial Instruments Regulation (UK MiFIR) and there will be no exemptions from the transaction reporting requirements under Article 26 for digital securities. The Treasury will also evaluate the need to modify other legislation, if so needed.