The Bank of England (BoE) and Financial Conduct Authority (FCA) have officially launched the UK Digital Securities Sandbox (DSS), a major step toward enabling regulated market infrastructures and new players to experiment with digital securities in a more flexible legal and regulatory environment. The final framework, though largely based on initial proposals, includes several important adjustments.
The DSS is the first financial market infrastructure (FMI) sandbox established under the Financial Services and Markets Act (FSMA) 2023, which empowered the Treasury to foster innovation by allowing real-time testing of new market infrastructure models. With the DSS, the BoE and FCA now have the regulatory flexibility to tailor the sandbox’s rules to accommodate individual projects, providing a more dynamic environment for digital securities development.
Following extensive consultations, the BoE and FCA have published key documents, including a final policy statement, Gate 2 rules, guidance, and access to the DSS dashboard.
Key updates and industry impact
The final DSS framework introduces several important changes. First, the regulators have emphasised a commitment to a flexible, applicant-led approach, responding to concerns that initial proposals might have restricted the sandbox’s flexibility. Regular roundtables will be held to discuss policy and foster continuous dialogue between industry and regulators.
The sandbox will also now allow non-sterling denominated assets, a shift welcomed by market participants after the initial framework limited the sandbox to sterling assets. This decision is expected to boost the sandbox’s appeal and strengthen the UK’s position as a global financial hub.
However, overseas entities hoping to participate in the DSS must establish a separate UK legal entity for certain cryptoasset-related activities. Although firms outside the UK can still engage with sandbox participants as customers or service providers, the requirement for a UK entity could pose challenges for some international players.
Addressing market concerns
In response to concerns about restrictive go-live limits, the BoE and FCA have introduced a mechanism for firms to apply for capacity uplifts once initial limits are reached. Additionally, individual limits will apply to fund tokenisation activities, further refining the framework for market participation.
Regulators also made amendments to the Gate 2 rules, simplifying requirements for smaller entrants and reducing capital thresholds. This ensures that innovation is accessible to smaller players, not just established institutions.
Looking ahead
The DSS is now open for applications, with processing times for initial applications ranging from 4 to 12 months, depending on the complexity of the project. The first opportunity to progress through Gate 3, offering higher operational limits, is expected between October and December 2025.
