The DSS will enable firms to model the operations of a central securities depository and trading venue using distributed ledger technology to accommodate digital assets.
The Government launched a consultation in July to assess market feedback on the initiative. This followed a Call for Evidence in 2021 to examine the application of distributed ledger technology for financial financial market infrastructures.
A key issue identified by market participants at the time was that the UK legislative framework has not been built to support the use of DLT in financial markets.
The Sandbox is seen as a way of testing the technology using temporary modifications to existing legislation, with the power to alter legislative frameworks as the tests progress.
"After having analysed the responses, the Government intends largely to retain the approach originally outlined in the consultation," states HM Treasury. "This will involve instituting a broad framework for the DSS in legislation, with the regulators given appropriate flexibility to manage requirements for participating entities."
The Government intends that all relevant assets currently in scope of the regulatory perimeter, aside from derivatives, are capable of being included in the DSS.
A number of respondents to the consultation criticised the decision to exclude unbacked cryptoassets from the sandbox.
In response, the Treasury states: "There is currently no established regime for cryptoassets that could be amended in the Sandbox.