EU adopts Blockchain, DLT-based pilot regime for market infrastructures

On 2 June 2022, Regulation (EU) 2022/858 on a pilot regime for market infrastructure based on distributed ledger technology (the Regulation) was published in the Official Journal of the European Union.

The regulation aims to eliminate regulatory barriers to the issuance, trading and after-trading of financial instruments in the form of cryptocurrencies and to ensure that EU regulators gain experience in the use of distributed ledger technologies (DLT) in multilateral trading facilities and settlement systems. It is the first to be implemented by three legislative initiatives announced in the Digital Finance Package, which the European Commission adopted on 24 September 2020.

European institutions’ perspective on Fintech and DLT

The regulation emphasizes that the EU has a political interest in promoting the introduction of transformative technologies in the financial sector. To that extent, the preamble to the Regulation clearly states that although many cryptocurrencies may fall outside the scope of current EU financial services legislation, many others qualify as financial instruments under EU law (see While (2), regulation). Therefore, a complete set of EU legislation on financial services already applies to issuers and companies that conduct activities related to such cryptocurrencies.

To enable their development, and DLTs in general, while maintaining a high level of investor protection, market integrity, financial stability and transparency, European institutions have adopted the Regulation to establish a DLT-based market infrastructure pilot regime.

Pilot regime for market infrastructure based on DLTs

The regulation establishes an experimental legal framework for trading and settlement of transactions in cryptocurrencies that qualify as financial instruments. Here a distinction is made between:

On such premises, the Regulation lays down requirements in relation to DLT multilateral trading facilities and settlement systems and their operators, regarding:

• allocation of specific authorizations and exemptions for the operation of DLT market infrastructures;

• management and supervision of DLT market infrastructures;

• cooperation between DLT market infrastructure operators, competent authorities and ESMA European Securities and Markets Authority.

The pilot regime drafted by the regulation will enter into force on 23 March 2023, while ESMA will work to prepare the necessary guidelines.

Other EU legislative initiatives within the digital finance package

The regulation is only one part of the more comprehensive legislative initiative that affects activities related to cryptocurrencies that the EU announced in its digital finance package in 2020.

European legislative bodies are currently discussing two different proposals for regulations that can be approved by 2023:

• the proposal for a regulation on markets for cryptocurrencies (sc MiCA), which aims to regulate cryptocurrencies such as not qualify as financial instruments under EU law;

• the proposal for Regulations on digital operational resilience for the financial sector (sc DORA), which will provide uniform requirements for the security of networks and information systems to entities operating in the financial sector and critical third parties providing information and communication technology related services.

Outlook

European institutions have taken steps to build an innovative regulatory framework that takes into account technological developments, such as DLTs and cryptocurrencies, in order to increase the EU’s competitiveness in the financial and technology sectors.

The EU’s implementation of the digital finance package is part of a broader effort to revive its role in a number of areas, through the creation of digital single markets that enable European companies and citizens to make the most of technological innovations.

The Commission’s notification regarding Shaping Europe’s digital future and the proposal for EU regulations for AI further signals the EU’s focus on establishing a legal framework that keeps pace with technological innovation. This also applies to DLTs and cryptocurrencies.

In 2026, the European Commission will be asked to evaluate the effectiveness of this pilot regime, which can be extended, changed or made permanent.

If this effort bears fruit, firms in the financial sector may be able to invest in DLT research and development and use this effort in a clearer regulatory environment.