The financial market infrastructure sandbox will provide a more flexible regulatory environment in which participants can provide trading and/or settlement infrastructure for digital securities. The intention behind the framework is to offer a significant level of adaptability while providing companies with a clear route to putting projects on a permanent legislative footing. The Sandbox provides a means of testing technology through temporary adjustments to existing legislation, and can modify legislative frameworks as the tests progress.

The consultation paper proposes that the Sandbox will extend to arrangements for the trading and settlement of digital securities such as equities, bonds and money market instruments. The proposal does not, however, include derivatives, unbacked cryptoassets or payments effected through systems that are not embedded in a “digital securities depository”. 

There are two suggested categories of digital securities. The first is “digitally native securities”, where the digital record represents the “top-tier register of ownership”. The second is “digital representations of traditional securities held at a CSD”, where in respect of securities immobilised with a CSD, the token or other record represents beneficial ownership interests. Further, limits will most likely be set on the volume of digital securities that can be tested in the Sandbox.

In terms of real-world market activities and assets, it is intended that the issuance, trading, settlement and maintenance of digital securities should be through entities within the Sandbox that will be able to interact with wider financial market activities, for example, for collateral posting or repos. Activities will most likely fall into two categories: (1) notary, settlement and maintenance services (similar to central securities depositories (CSDs)); and (2) the operation of a trading venue (i.e. similar to multilateral trading facilities (MTFs) or organised trading facilities (OTFs)).

There are typically two distinct stages of a Sandbox, including: 

• Application: Applications may be made by authorised CSDs and MTFs / OTFs as well as new entrants that are not yet authorised, provided they are established in the UK
• Sandbox Approval Notice: Once accepted as a Sandbox Entrant, they would be issued with a Sandbox Approval Notice (SAN). The Sandbox Entrant would not be able to perform any live activity until designated as a Digital Securities Depository or authorised as an investment firm operating an MTF or OTF. The UK’s Financial Conduct Authority (FCA) will be the regulator for the operating trading venues appointed as Sandbox Entrants.