In March 2023, the EU DLT Pilot Regime commences, enabling regulated tokenized securities to be traded using blockchain technology. While the sandbox supports some regulatory exemptions (see footer), it has financial limits. Market participants are concerned about these monetary caps, the potential six-year duration of the sandbox and uncertainty about what happens at the end.
DLT caps are a problem for large players
There are few bigger capital market players than BNY Mellon, the world’s number one global custodian with $43 trillion in assets under custody and administration. While highly supportive of the DLT Pilot Regime goals, BNY Mellon’s Benjamin Duve has reservations. “The true problem for us and many of the other bigger players in the market is if you look at the caps – who can issue, how much you can put in the system – the limits can be reached within days. Or the majority of our clients cannot be served,” said Duve, talking at the Crypto Assets conference.
According to the EU legislation, any distributed ledger platform has an overall volume limit of €6 billion ($5.9bn) of securities issuance or a market capitalization of €9 billion ($8.8bn). Additionally, any issuance is capped at €500 million for equities (company market cap) and funds and €1 billion for bonds.
“So the question is, where do I go with this? Do I try to use the technology in a regulatory compliant manner outside the Pilot Regime to build truly scalable solutions?” He raised the concern of fragmented liquidity pools.
Duve added that because of the caps, it is hard to use the Pilot Regime “to truly change (how) global capital markets or European capital markets work.” He wanted to see financial limits based on the size of the participants.
The BNY Mellon tokenization lead also had concerns over what happens at the end of the Pilot Regime. Even though innovation is fostered during the pilot, it could be more restrictive and highly regulated when it ends.
Kurt Zeimers of BNP Paribas agreed with Duve regarding the caps and concerns about what happens at the end. However, he added, “If we don’t participate in the Pilot Regime, we will never have a change of the CSDR article 3,” which requires central securities depositary book entries. He sees participation as a way to demonstrate the need for change.
ESMA, the regulator, also reviews progress and can take industry feedback into account. However, it was clear that the industry had given feedback about the cap issue before the legislation was passed.
Too little, too late, too long?
Simon Seiter sees the Pilot Regime as too little, too late and too long, particularly for large capital market players. Seiter works for German private bank Hauck Aufhäuser Lampe and was Head of Digital Assets at Deutsche Börse until late last year. He thinks the Pilot Regime caps can work fine for investment platforms.
“I would like to have a Regime,” rather than a Pilot, said Seiter. “What you build in the sandbox works in the sandbox, but not in the real world. If you have to build it for the real world, it works differently from the sandbox.”
But not everyone is unhappy about the DLT Pilot Regime. SWIAT, a regulated digital instruments technology solution initiated by DekaBank is happy with it.
Max Heinzle, the CEO of Startup 21.finance which is building a trading platform, is delighted. “Where in the world do we see such a form of legal framework that has this disruptive potential to disintermediate in the level of the DLT Pilot Regime allowing for atomic matching and settlement,” he said.
DLT Pilot Regime exemptions
As background, the key exemptions in the DLT Pilot Regime are that a single DLT platform can support issuance, trading, settlement and custody of securities. It also allows market infrastructures to service clients directly without intermediaries.