IRSG response to Digital Securities Sandbox joint Bank of England and FCA consultation

Published 29 May 2024

The IRSG welcomes the opportunity to respond to the Bank of England (the Bank) and Financial Conduct Authority (FCA) joint Consultation on the Digital Securities Sandbox. Overall, we are broadly supportive of the regulator's proposal for the implementation and operation of the Digital Securities Sandbox. Key views include:

• The DSS proposal is a strong starting point for a flexible and commercial sandbox that is capable of laying strong foundations for the use of innovative technologies in the UK capital markets. We welcome the glidepath approach as a positive step to mitigate cliff-edge risks and enable firms to build up compliance so that on graduating out of the DSS they are capable of meeting the general regulatory framework.
• A proportionate and flexible approach will allow for innovation while maintaining the security and efficiency of the financial system. This is vital to the efficacy of the DSS in supporting the long-term competitiveness of the UK’s capital markets. The Regulators must keep in mind the principle of “same activities, same risks, same rules” to mitigate risks and avoid a lowering of the overall standards of regulatory outcomes.
• The scope of permitted assets should be extended to include the use of electronic money (e-money) and other permitted versions of stablecoins when used in the context of a Central Securities Depository (CSD) to settle transactions with other wholesale market participants.
• The FCA should clarify how these rules will be interpreted in the context of sandbox entrants who may wish to enable direct trading capabilities to retail customers.
• Firms should have a single point of contact for the Regulators for all DSS-related activities so that this can be managed in a streamlined manner and so that decisions can be taken by the Regulators in a concerted and coherent way.
• The proposed limits on the value of securities that can be issued and traded within the DSS are restrictive and risk deterring entrants by limiting the prospect of commercial gains. The UK should learn from the EU's DLT Pilot Scheme and avoid the same shortcomings and limited entrants.