The Digital Securities Sandbox (DSS) is a modification of existing regulations, which create a controlled environment for financial firms to experiment with trading securities on blockchain technology.

The DSS falls under the purview of the Financial Services and Markets Act and will be overseen by the Financial Conduct Authority (FCA) and the Bank of England. The DSS allows companies to engage in asset tokenisation, where representations of securities are traded on the blockchain.

Almost anything can be tokenised, from art pieces to intellectual property. The proliferation of the technology is reshaping industries like real estate, by democratising the ownership of industries. Digital dollars like stable coins have been the most successful tokenisation implementation, making up 10% of crypto’s total market value, and roughly 97% of all tokenised assets.

There are currently about 431 million crypto users – just over 5% of the world’s population – leading some experts to posit that tokenisation could become a multi-trillion-dollar market by the end of the decade.

Despite the growing interest in blockchain-based securities trading, financial firms face legal and regulatory hurdles. The DSS emerges as a response to these challenges and follows a consultation process initiated after a government report highlighted the inadequacies of the UK’s legal framework in supporting blockchain use.

“It’s great to see the UK truly starting to take ownership of its crypto policy. This quick and strong move from HM Treasury is a big positive — now it is time for participants to enthusiastically engage and prove that positive change merits proactive participation,” said tenured financial regulatory lawyer and CEO of Bittrex Global, Oliver Linch on LinkedIn.

Speaking in an interview in December, Kelly Coulter, a digital asset specialist at the FCA, emphasized the importance of the DSS, noting that it provides a live environment for registered and regulated firms to test the trading and settlement of traditional assets using blockchain technology.

Unlike the FCA’s existing innovation sandbox, which assists fintechs in testing consumer-focused products, the DSS is designed for companies involved in the infrastructure of securities markets, such as stock exchanges, clearing houses, and investment firms.

The launch of the DSS aligns with global efforts to ease regulatory restrictions on blockchain technology in financial markets.

The European Union introduced its Distributed Ledger Technology Pilot last year, aiming to enable trading and settlement firms to experiment with blockchain. Additionally, the FCA, along with Swiss and Japanese regulators, collaborated with the Singaporean government on Project Guardian, exploring fund and asset tokenisation use cases, as well as decentralized finance.