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In 2016 ESMA already published a first discussion paper about possible applications of Distributed-Ledger-Technology for the securities markets. In 2020, the European Commission presented the EU Digital Finance Package. It includes the DLT pilot regime, an EU-wide sandbox in which securities trading and settlement providers can be exempted from certain regulations to build a Distributed Ledger Technology (DLT) infrastructure.
It aims to further support and promote the potential of digital finance in terms of innovation and competition while reducing potential risks and the creation of new products and services in securities trading and settlement using DLT. The pilot sandbox environment is planned for six years, starting on 23 March 2023, and will allow permissioned firms to provide services across the EU. Market participants can move beyond proof-the of-concept level and develop DLT use cases in a secure regulatory environment. Temporary exemptions from certain regulations such as MiFID, CSDR, MiFIR, etc. are possible for this purpose.
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DLT MTF
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DLT TSS
Until now, Article 3 of the CSDR Regulation (EU) 2014/909 has required book entry in the securities account if transferable securities are admitted to or traded on trading venues. The DLT Pilot Regime enables the trading and settlement of DLT securities by exempting them from any regulations, which means that securities can be traded and settled via DLT infrastructures for the first time in the EU.
This results in new business areas and roles: For example, a DLT MTF can directly provide investors with access to trading venues without having to comply with the brokerage obligation under MiFID II.
DLT-SS can be exempted from existing regulations, for example, to process settlements with e-money tokens or not to have to record securities in book-entry form according to CSDR. A completely new role is the DLT-TSS, which allows DLT-MTF and DLT-SS roles to be combined. Both MTFs, investment firms and CSDs can be authorized as DLT-TSSs and combine the activities as trading and settlement systems with the help of DLT.
Depending on the technical setup and the developments within the sandbox, other areas such as issuing, custody and asset servicing may follow, so that the entire value chain on DLT in one role is imaginable in the future.
The maximum total market value of all DLT financial instruments admitted to
trading on a DLT market infrastructure shall not exceed EUR 6 billion.
Evaluate which products and services might be best suited for the beginning, given the possible exemption from regulations and the DLT.
Which DLT platform meets the regulatory requirements and satisfies the internal requirements?
Which partners, issuers and customers are suitable for the use cases defined in the DLT Pilot Regime?
Which use cases could be possible in the future?
Are connections to new DLT platforms possible at any time?
Can digital currencies be processed?
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Regulation as an innovation driver for the fund industry.
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