ESMA finalizes process for EU DLT pilot regime – Ledger Insights
Yesterday, the European Securities and Markets Authority (ESMA) published the final format for the application process to participate in the EU’s DLT Pilot Regime for digital securities. The program starts in March 2023 and the application forms allow participants to start preparing.
The pilot program allows market infrastructure to use blockchain, either permissioned or permissioned, for the issuance and trading of tokenized stocks, bonds and funds, including money market funds. Participants have limited exemptions from applicable legislation.
For example, for exchanges or multilateral trading facilities (MTFs), one of the exceptions is to allow users to trade directly without going through a broker. Another is the combination of a trading and post-trade infrastructure, so that a central securities depository (CSD) can also operate an exchange or vice versa. Or a broker can do both.
Regarding the application process, ESMA carried out a consultation which ended at the beginning of September.
An ESMA observation based on the responses is that if an exchange offers DLT-based CSD services or a CSD offers a DLT-based exchange, they must still comply with most existing legislation for any additional role they undertake.
How many will participate in the DLT Pilot Regime?
The consultation received only ten responses, although it was quite narrow, focusing on the application forms that national supervisory authorities will use.
One of the questions is how many organizations will participate in the pilots. During a conference in October, a BNY Mellon executive raised concerns about the rates involved in the regime, which are small for large players.
Securities issued under the DLT Pilot Regime are limited to €6 billion, with market capitalization limited to €9 billion for a single platform. Bigger players can reach these limits in days. Any single issue of funds or shares (market value) is limited to €500 million, with up to €1 billion for bonds.
The legislators do not want the limits to be higher because they see it as experimental. Some will see the combination of roles within FTX as an important lesson.
If larger established players want to push, they must comply with existing regulations, which will inevitably lead to compromises and solutions. Or there is another way.
Crossover with projects in the country
One of the respondents to the consultation asked if they could use an existing national DLT authorization instead of going through the EU application process. ESMA’s view is that it is not possible because this is an independent pilot and applies to the whole of the EU. National rules are likely to replicate the DLT Pilot Regime rules only in part. So it is a separate project.
Some EU countries are more advanced than others when it comes to DLT legislation. Luxembourg, Germany and France spring to mind.
Going back to the previous point about larger players, some of them may choose these progressive jurisdictions without the size limits to make faster progress.
Meanwhile, many in the industry believe that for blockchain to be adopted in the securities sector, central bank money is required on the ledger. To support the DLT Pilot Regime, Banque de France is therefore planning wholesale pilots for central bank digital currency (CBDC).
