Playing Smart In the Sandbox: Building Digital Post-Trade Through the UK Digital Securities Sandbox

By Akash Sharma | Policy & Regulatory Affairs at ClearToken

As we begin to look forward to 2025, many people are looking at the US and what a potential Trump presidency will mean for crypto markets. However, it is the UK where a quiet storm is brewing which could result in the first major innovation in tokenisation and digital assets taking root. The unlikely source of this in the often overlooked, and seldom understood, bit of financial market infrastructure, the Central Securities Depository (CSD).

What are CSDs?

At their core, CSDs play three fundamental functions:

• notarising the issuance of new securities,
• maintaining the top-tier books and records, and
• operating a securities settlement system.

The importance of these functions cannot be overstated. By ensuring the integrity of newly issued securities and maintaining an accurate, official ledger of ownership, CSDs provide market participants with confidence that traded securities will be delivered and correct payments will be made.

By acting as a neutral intermediary in the settlement process, CSDs significantly reduce counterparty risk, ensuring that securities and payments are exchanged simultaneously. This eliminates the risk of one party defaulting on its obligations, which, if left unchecked, could trigger cascading failures across the financial system. When transactions occur on a Delivery versus Payment (DvP) basis, CSDs provide settlement finality: the assurance that once the title is transferred, settlement occurs, and transactions are legally and operationally irreversible. This feature is a cornerstone of systemic risk mitigation and is vital to fostering confidence in financial markets.

The reliability of CSDs over decades - operating through a few trusted entities - has ensured the relatively smooth and uninterrupted settlement of transactions. Their success in fulfilling these vital roles, often behind the scenes, underpins the relative safety and trust that modern financial markets rely upon.

Regulating CSDs

Due to their important role in financial markets, regulations have been brought in to ensure the robustness of CSDs in key jurisdictions. ?In Europe, the Central Securities Depository Regulation (CSDR) came into effect in 2014 as a way to regulate EU CSDs to a high standard, owing to their crucial role in financial markets (CSDR was on-shored in the UK following Brexit). This further reinforced the stability of CSDs in the market.

It is because of this stability that disruption and innovation of this system has not been seen as a priority.

What is wrong with the current system???

A problem with CSDR is that it was made post-hoc. In other words, it was made for the regulation of already operational CSDs, under the assumption of a mature CSD market in which all CSDs were systemic. While this was beneficial to provide stability to the system, it also added disproportionately high requirements on new CSDs entering the market as it assumes the activities of a CSD are inherently systemic. Likewise, definitions of the activities of CSDs may not be technology neutral. For example, a “book entry form” could exclude entries on a distributed ledger. While the inherent flexibility of English common law may make this concern less pertinent, it nonetheless remains to be tested in court, which adds regulatory uncertainty.

All this means that while regulations have protected the system as it is, they have created high regulatory barriers for new CSDs to enter the market and stifled innovation in the process.

The Digital Securities Sandbox

In response to perceived regulatory obstacles that may hamper the growth of transformative technology like DLT and tokenisation, HM Treasury, alongside the Bank of England and the FCA, created the Digital Securities Sandbox (or DSS). The DSS enables firms to trade and settle live transferable digital securities under an adapted regulatory framework, using innovative technology like DLT and tokenisation. Firms in the DSS can offer CSD services to the market on a par to any other CSD, up to a certain limit.

There are 3 key features of the DSS:?

1. Removes Barriers to Using Innovative Technology: It removes potential barriers to undertaking settlement using DLT and tokenisation technology, enabling innovation and providing regulatory clarity.
2. Proportionate Regulation: It effectively lowers requirements for new entrants while imposing stricter activity limits. Firms wanting to undertake more activity will need to meet higher requirements to scale up – essentially making the regulations proportionate to the risk from the activities.
3. Glidepath to Full Authorisation: As firms scale, the Government can update CSDR at any time, allowing firms to apply for full authorisation and to exit the DSS and operate without any limits.

ClearToken in the Digital Securities Sandbox

Last week, ClearToken became the first firm to enter the DSS, making us eligible to apply to become a Digital Securities Depository (DSD) in the UK. This will allow us to use our DLT-based settlement system to settle tokenised securities.

Through our participation in the DSS, the UK digital asset market will be able to access three key benefits in 2025:

1. 24/7 Settlement: Enhancing Liquidity and Market Access

Traditional settlement systems operate within defined business hours and are constrained by cut-off times and weekends, creating delays and liquidity bottlenecks. ClearToken’s DSD will enable round-the-clock settlement, ensuring that transactions can be executed and settled in real time at any hour, including weekends and public holidays.? This leads to:

• Improved Liquidity: Continuous gross settlement means that assets are no longer “locked up” due to settlement delays, freeing up liquidity and allowing participants to reinvest or redeploy capital instantly.
• Faster Trade Execution: Our platform will support multiple net settlement windows in a single hour, meaning counterparty risk is significantly reduced, as trades blocked by gross settlement bottlenecks no longer remain unsettled for extended periods.

2. Fractional Ownership: Increasing Accessibility and Liquidity

The use of DLT facilitates the seamless division of securities into smaller, fractional units. Fractional ownership means that assets popular with retail investors, such as government bonds, and large illiquid assets, such as commercial real estate, can be acquired by smaller investors, repo’d or liquidated to raise cash.? This results in:

• Unlocking Liquidity for Issuers: Asset owners can attract a broader pool of investors, increasing demand and liquidity for their securities.
• Portfolio Diversification: By enabling smaller investment sizes, investors can diversify their portfolios more effectively, improving risk management and long-term returns.
• Social Inclusion: Large denomination shares and bonds or units of private investment vehicles such as venture capital or private equity funds, can be afforded and invested in and owned by smaller investors for the first time.

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3. Efficiency Gains: Reducing Costs and Operational Complexity

DLT brings significant improvements in efficiency by automating processes, reducing the need for reconciliation of records and reducing the cost of settlement. This could improve the affordability of services that banks provide their customers which were previously too expensive. ?This brings about:

• Cost Reduction: By removing manual reconciliations, reducing counterparty risk, and streamlining settlement workflows, DLT-based CSDs will lower operational and administrative costs for market participants.
• Elimination of Reconciliation Errors: The immutable nature of distributed ledgers ensures that ownership records are accurate and tamper-proof, eliminating discrepancies and delays caused by reconciliation processes.
• Real-Time Reporting and Transparency: With all participants accessing a shared ledger, the system offers real-time visibility into ownership, transaction status, and settlement completion, enhancing transparency and compliance with regulatory standards.

Through ClearToken’s participation in the DSS, these theoretical improvements can be realised not in a distant future or as a proof of concept, but through live trading in 2025, shaping the digital post-trade landscape.

However, this is just the beginning, as alongside the DSS, the Government has also committed to issuing a Digital Gilt at a DSD in the DSS.

These developments make 2025 an exciting time to be in the digital asset space in the UK, especially at ClearToken.

Akash joins us from the Bank of England where he jointly led the Post-Trade Innovation team creating the Digital Securities Sandbox. Prior to the Bank of England, Akash worked at HM Treasury on a series of high-profile policy roles including financial sanctions, post-Brexit trade policy and the Covid-19 Response team. Akash has a Masters in Global Politics from the London School of Economics and has completed the Chartered Blockchain Analyst I qualification.