Digital finance: Pilot regime on distributed ledger technology market infrastructures (DLT)

EU Pilot regime on distributed ledger technology market infrastructures (DLT).

The European Parliament adopted the European Commission’s proposal for a Regulation on a pilot regime for market infrastructures based on Distributed Ledger Technology (2020/0267(COD) at first reading on 24 March 2022.

Distributed Ledger Technology (DLT) is a protocol that enables the secure functioning of a decentralized digital database. Distributed networks eliminate the need for a central authority to keep a check against manipulation.

The European Commission had already adopted the proposed Regulation in September 2020 as part of its Digital Finance Strategy. One of the aims of the pilot regime was to acquaint the European Union’s financial services legislation with DLT and crypto-assets.

The DLT pilot regime aims to test the development of the European infrastructure for trading, clearing and settlement of DLT-based financial instruments. Crypto-assets are one of the main DLT applications for finance. Distributed ledger, broadly defined, is a consensually shared database through which a transaction is validated.

The DLT Pilot will have a life span of 3 years and aims to future-proof the economy whilst paving the way for additional innovative technologies by promoting such transformative technology within the financial sector.

Among other things the Parliament’s announcement mentions that negotiators have sought to balance innovation whilst preserving financial stability. They have decided that financial instruments services provided using the DLT market should be limited and subject to value thresholds, as follows:

• Shares (500 million euro).
• Bonds (1 billion euro).
• Corporate bonds (200 million euro).
• Units of collective investment undertakings (UCITS) (500 million euro).
• Operators of DLT can admit new financial instruments only until their total market value reaches 6 billion euro.

“National competent authorities will remain in charge for the authorisation while the ESMA (The European Securities and Markets Authority) can issue an opinion on the application for authorisation to operate an DLT multilateral trading facilities (DLT MTF) and DLT settlement systems (DLT SS). The opinion would be non-public and non-binding but an explanation would be needed in case the national competent authorities decide to significantly deviate from it.” The European parliament says.

The main idea is to allow companies to try blockchain technology in their business. EU plans to create their own space for new players to try and use all of the benefits of DLT and blockchain. If businesses are interested in this “governed” infrastructure the project will move from it’s demo version into a real infrastructure for any appropriate player to use.