The UK's top financial watchdogs have issued a joint consultation and draft guidance on a new Digital Securities Sandbox (DSS).

The Bank of England (the Bank) and the Financial Conduct Authority (FCA) said that the five-year-long sandbox will modify regulation to allow firms to use new technology, including distributed ledge technology (DTL), in the trading and settlement of digital shares and bonds.

Under the modified regulation, successful applicants for the scheme will have permission to carry out securities depository and settlement services whilst operating a trading venue.

This means that for the first time UK firms, including new financial markets infrastructure providers, will be able to provide these services from a single legal entity.

Sheldon Mills, executive director, consumers and competition at the FCA said that the DDS will reshape how the organisation regulates by allowing firms to test regulatory changes using "real world situations" before these changes are made permanent.

The Bank said that the sandbox could lead to a new permenant regulatory regime for securities settlement under which firms could operate in future, adding that the government has the tools to make these changes "reasonably quickly".

“The Digital Securities Sandbox is an important tool for regulators to learn how we need to react to benefit safely from developments in technology and changes to vital financial market processes such as securities settlement," said Sasha Mills, executive director for financial market infrastructure at the Bank.

Alongside the consultation paper, the regulators published draft guidance for firms, including details of how the Bank plans to allow firms to scale their activities once authorised to undertake live activity.

Feedback on the consultation will be open until 29 May 2024.

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