The European Securities and Markets Authority launched a consultation on January 4 seeking feedback from stakeholders about the need to amend the regulatory technical standards (RTS) concerning pre- and post-trade transparency and data reporting requirements for a pilot regime based on blockchain technology.
This pilot regime for market infrastructures based on distributed ledger technology (DLT) (“the DLT Pilot”) aims at developing the trading and settlement of ‘tokenized’ securities. According to ESMA, the DLT Pilot will “enable market participants as well as EU regulators to gain experience on new opportunities and issues raised by DLT while ensuring financial stability, investor protection and market integrity.”
The DLT Pilot is not yet finalized, but the European Parliament and the Council reached an agreement in November 2021, and legislators are expected to sign off the proposal during the first quarter of 2022. The DLT Pilot would start applying 9 months after the publication of the regulation, this means that the program may not effectively start until 2023.
The DLT pilot introduces three categories of DLT market infrastructures (DLT MI): DLT Multilateral Trading Facilities (DLT MTF), DLT Trading and Settlement Systems (DLT TSS) and DLT Settlement Systems (DLT SS). The permission to operate a DLT MI may come in addition to an authorization as a Central Securities Depositary or as an investment firm (or regulated market), or can be granted to new entrants that will have to meet the relevant MiFID II requirements.
One important point on the agreement reached by the parliament and the council is that the regulation has to be technologically neutral and avoid references to a specific type of DLT. This, in theory, leaves the door open for permissionless DTLs, as long as these comply with the requirements for DLT MI.
The reason to launch this DLT pilot is because despite crypto assets being one of the major applications of blockchain technology in finance, the existing provisions in EU legislation may prevent the use of DLT. This initiative, according to ESMA, will facilitate the creation of an EU framework that will enable markets in crypto assets and the wider use of DLT in financial services.
The European Union is betting strongly on the use of blockchain technology and DLT because regulators see this technology as a trigger for other innovations. After losing the competition for cloud computing and online platforms, which has been dominated by U.S. firms, EU policymakers have seen in blockchain the opportunity to gain a competitive leg up in another important technological race.
The DLT pilot and this consultation on RTS are part of a much bigger package of measures proposed by the European commission to support the potential of digital finance. Two other important instruments are the Markets in Crypto-assets Regulation (MiCA), which may be approved in 2022, and the Digital Operational Resilience Act (DORA). MiCA will apply to any person providing crypto asset services or issuing crypto assets in Europe. It will also apply to central bank digital currencies (CBDC) and stablecoins. While MiCA contains a number of requirements that issuers of tokens and cryptocurrencies will have to follow to comply with the law, the good news is that the EU adopted a very permissive approach. Amendments to the proposal are expected during the parliamentary process, especially requirements that may be burdensome for startups and smalls firms, compared to the incumbent financial institutions, but the proposal has a good chance of being approved.
ESMA’s consultation will close on March 4, and if the EU regulator considers it necessary to change the RTS for transparency and data requirements, it will publish a proposal that will also be subject to public consultation before submitting the final draft to the European Commission.