European Commission extensively examines distributed ledger technology concerns in the context of the capital markets union discussion
European Commission Launches Consultation to Address Challenges in DLT Pilot Regime
The European Commission has launched a consultation regarding the capital markets union (CMU) that runs until 10 June, with a focus on the Digital Ledger Technology (DLT) Pilot Regime. The consultation aims to address the current limitations in the regime and pave the way for its success and competitiveness.
Key aspects of the current status and future changes include:
- Volume Cap Limits: The regime imposes a volume cap of €6 billion on transactions, which limits market participants' ability to generate sufficient returns and thus dampens interest and uptake. Experts advocate for a pathway to full uncapped adoption post-pilot phase to boost participation and scale.
- Cash Settlement Challenges: Presently, only e-money tokens issued by credit institutions are permitted for settlement under the pilot regime. This restriction is viewed as a significant barrier. ESMA and industry experts suggest allowing settlement in euro-denominated stablecoins licensed under the Markets in Crypto-Assets Regulation (MiCA). This would improve efficiency and support the growth of European stablecoins, enhancing competitiveness against U.S. markets.
- Regulatory Gaps and Integration: There are still important gaps not fully addressed by the pilot regime. One critical issue is the lack of seamless access to central bank money for DLT-based financial instruments, which is essential for delivery-versus-payment (DvP) settlement finality and investor trust. Efforts are underway to integrate DLT instruments into the Eurosystem’s monetary policy framework, alongside further development of the pilot regime including removal of current limits on volume and scope.
- Need for a Regulatory Push: Analysts warn that without fixing these design flaws, the EU risks becoming a "regulatory fly-over zone" in digital assets innovation, losing ground to other global jurisdictions.
In addition to these issues, the consultation also delves into the complexities of tokenization, particularly in determining which laws apply to a transaction. The Commission is considering various options for multi DLT interoperability, including a Central Securities Depository (CSD) integrated with numerous blockchains, a technology company providing interoperability, and a regulated entity offering a solution for regulated financial institutions.
The questionnaire is extensive, with a five-page section dedicated to the DLT Pilot Regime and tokenization more broadly. It also includes a whole section about permissionless blockchains. The document includes many detailed questions about distributed ledger technology (DLT), including the preferred connecting factor for proprietary, contractual, and system-related aspects related to transactions on a DLT system.
The complexity of tokenization extends beyond the EU, making the consultation an important step in shaping the digital assets landscape. The Commission is also considering the regulation of interoperability providers and the potential implications of the EU transition rules for Basel, which don't make a distinction between permissionless and permissioned chains, implying that EU banks could use permissionless blockchains currently.
Two institutions have received approval under the DLT Pilot Regime so far (21X and CSD Prague). The outcomes of this process could significantly shape the European digital assets landscape.
- The European Commission's consultation on the Digital Ledger Technology (DLT) Pilot Regime highlights the need for lifting volume cap limits to boost participation and scale in the capital markets union (CMU).
- The consultation also addresses the restriction of only e-money tokens issued by credit institutions for settlement under the pilot regime, advocating for settlement in euro-denominated stablecoins licensed under the Markets in Crypto-Assets Regulation (MiCA).
- A critical issue identified in the consultation is the lack of seamless access to central bank money for DLT-based financial instruments, essential for delivery-versus-payment (DvP) settlement finality and investor trust.
- The consultation delves into the complexities of tokenization, considering options for multi DLT interoperability, including a Central Securities Depository (CSD) integrated with numerous blockchains.
- The Commission is also considering the potential implications of the EU transition rules for Basel, which could allow EU banks to use permissionless blockchains currently.
