BoE’s digital securities sandbox to lead to new regulatory regime

The Bank of England is set to launch a sandbox for digital securities this summer, inviting private sector players to set up real-world trading systems.

This could lead to the creation of a new permanent regulatory regime for digital securities, according to Sarah Breeden, a deputy governor.

The central bank announced on April 3 that it is consulting jointly with the Financial Conduct Authority  on operating a “digital securities sandbox”. Breeden, speaking on April 15, said the regulators will review feedback to the consultation and open the sandbox to applications in the summer.

The sandbox will encourage private players to use new technology, such as distributed ledger technology (DLT), in the trading and settlement of digital securities.

Breeden emphasised the real-world implications of this sandbox, as she said the central bank intends to create a new regulatory regime after learning from the private players’ experiments.

“I want to emphasise the ‘real world’ aspect, because ‘sandbox’ as a moniker probably undersells the innovation we’re making as regulators here,” she said.

“These won’t merely be prototypes or experiments. Our aim is to design the sandbox so that sandbox entrants and the digital securities in it are used in broadly the same way as in the conventional financial system,” she added.

The deputy governor noted that at present, although financial market transactions take place speedily, clearing and settlement is slower because all parties to a transaction have to update their records. She emphasised the merits of DLT as a way for a“single, definitive database to be shared and updated simultaneously across all network participants” .

Breeden exhorted commercial banks to adopt new technology in the realm of payment innovation.

“It strikes me that, for banks, as the incumbents, payments innovation is both a first-tier opportunity – given the potential benefits for them and their customers of additional payments functionality – and a first-tier threat – given the risk of disintermediation by new players,” she said. “That in my view demands urgent action.” 

Breeden said the UK’s real-time gross settlement (RTGS) infrastructure will potentially expand to link the BoE’s traditional ledger to other ledgers, including those using DLT.

Later this year, the RTGS will transition to a more “a more resilient and capable core settlement engine”, including an ability to operate 24/7 in the future. The BoE is also exploring ways to allow a wider range of financial firms to connect to the core settlement infrastructure.