The Bank of England (BoE) and the Financial Conduct Authority (FCA) plan to adopt a proactive and flexible regulatory approach through the Digital Securities Sandbox (DSS). This initiative represents a significant change in the mindset of regulators, according to BoE Executive Director Sashi Mills.
During City Week 2024, Mills discussed the importance of innovation in maintaining financial stability and highlighted the role of the DSS in supporting innovation. The DSS will operate under a more flexible rulebook that can be adjusted based on observations and insights gained from activities within the sandbox. This will allow regulators to employ new methodologies, maximize the potential benefits of innovation, and effectively manage risks to financial stability.
Mills suggests that this proactive approach will enable the BoE and the FCA to give firms the opportunity to utilize developing technologies that would otherwise not be allowed. One such technology is digital ledger technology (DLT), which facilitates the issuance, trading, and settlement of securities. Firms operating within the DSS, known as Digital Securities Depositories (DSDs), will have limits on the value of securities they can handle. These limits will be adjusted as firms demonstrate their ability to meet regulatory standards.
Through the use of DLT, the DSS aims to address inefficiencies in post-trade environments, which, according to Mills, can reduce barriers to entry for providers and enhance the resilience of financial markets.
Mills’ explanation of the purpose and implications of the DSS aligns with FCA executive Matthew Long’s announcement on May 8 that the regulatory body intends to combine the best aspects of traditional finance and decentralized finance (DeFi).
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