The UK’s Financial Conduct Authority (FCA) opened the Digital Securities Sandbox (DSS) for applications at the end of September. It relaxes certain rules for DLT market infrastructures. Some of the first applicants have already received preliminary approval, although admittedly it doesn’t mean that much because they can’t go live. However, given it’s only been six weeks since applications opened, it appears the FCA plans to move fast.
The two entities that have announced preliminary approval are (intended) central securities depository (CSD) Montis (owned by Archax) and ClearToken, which plans to operate as a central clearinghouse for crypto and tokenized assets. ClearToken is backed by Nomura’s Laser Digital and Standard Chartered’s Zodia Custody, amongst others.
Like the EU’s DLT Pilot Regime, the DSS plans to relax the rule that exchanges and central securities depositories must always be separate. With DLT, that split is sometimes impractical. The first EU approval of CSD Prague happened 18 months after the legislation came into force. Only two EU entities have been approved so far.
In an attempt to address these sorts of delays, the UK has created a gate system, with Gate 1 as preliminary approval, and Gate 2 as permission to go live within the sandbox. These preliminary approvals are only for Gate 1. For existing regulated entities, the gap between Gate 1 and Gate 2 should not be too significant. The FCA said early bank applicants could earn Gate 2 approval by February 2025, with unregulated entities closer to November 2025. Others would be somewhere in between.
Both of the startups, Montis and ClearToken, are yet to receive regulatory approval, so they are likely to have to wait a while to receive Gate 2 clearance. That said, Montis has been working on its CSD licensing for years.
“By applying to the DSS, we are taking a significant step toward creating a dynamic, globally connected financial ecosystem based in the UK,” said Montis Group CEO Martin Watkins. “Our proven capabilities in Luxembourg, where we have built an infrastructure service aggregate and record both conventional and natively digital securities using DLT, will provide a strong foundation for the UK’s digital securities markets.”
