During the recent Crypto Asset Conference, one of the panels featured speakers from Societe Generale Forge and Goldman Sachs. Both see potential in the DLT Pilot Regime, the EU initiative that relaxes some laws for trading and settlement platforms. Previously banks such as BNY Mellon expressed reservations about the initiative because the transaction limits are relatively low.
The Regime came into force in March, and apart from a couple of startups, there have been no announcements of major initiatives.
Mathew McDermott, who leads Digital Assets at Goldman Sachs, said the Pilot Regime provides a catalyst. The European Investment Bank (EIB) recently used Goldman’s Digital Asset Platform (GS DAP) for a bond issuance. However, because GS DAP is not registered as a central securities depository (CSD) it wasn’t possible to make a secondary market for the bond using trading venues.
“Being able to get into the EU pilot, you can transform that,” said McDermott. “You can showcase how the market will operate within the EU pilot. And then I hope we don’t need to wait five years to have regulatory change. It’s something that could be looked at in parallel.”
DekaBank’s Marion Spielmann noted the small scale of the DLT Pilot Regime meant it can’t drive revenues. She believes one of the reasons for the lack of participants is the uncertainty of what will happen in three years when regulators review the pilot’s progress.
“I think it shows the value proposition, which is key to all of this,” McDermott responded. He noted the similar program in the UK and other jurisdictions. While it’s not perfect, it’s workable. And the industry must move forward.
He continued, “You need that because, in three years’ time, you can’t be sat here talking about the same thing, because most digital asset businesses will have closed down. So this is all good, positive progress.” McDermott said Goldman is involved with two or three Pilot Regime applicants.
Big banks collaborate?
David Durouchoux of Societe Generale Forge (SocGen Forge) was even more bullish. “For us it’s perfect. It gives legal assurance,” he said. He highlighted the importance of sell side banks uniting around a small set of platforms and standards to create liquidity. It’s key to avoid the fragmentation we’ve seen on tokenized bond issuance, where each bank has its own platform. And most of them are not interoperable.
Earlier in the panel, Durouchoux implied a collaboration between the big banks. “We’ve been trying to (build a) hybrid between JP platform, Goldman, our platform. It’s pretty complicated. And I think the engineers are working hard to solve that,” said Durouchoux. When we asked about this project after the event, he clarified that this referred to an attempted repo test a couple of years ago, where the smart contracts of the bond on the Ethereum chain were not compatible with the repo master agreements of each firm.
Durouchoux segued from the joint project to the DLT Pilot Regime. “The matter is not just technological. The Pilot Regime opens room for discussion based on the secondary trading, which can be completely off chain. We can imagine having (an) agreement between big firms doing business, providing liquidity to the market,” said Durouchoux.
The SocGen executive observed that whenever there are real trading volumes, the back office has to catch up. If they can get digital asset trading volumes going, the back office (DLT) teams must make it work, somehow.
The final takeaway is that the DLT Pilot Regime is not just for startups. Big institutions are engaging.
Update: Added follow up comments from David Durouchoux