On Friday the European Fund and Asset Management Association (EFAMA) published a report entitled “Tokenisation, a buyside practitioner’s guide”. For asset managers it says “the strategic risks of inaction are significant”, arguing that the operational efficiencies from DLT will result in early adopters being more profitable. It reviews the legal landscape in a handful of EU jurisdictions, urging further regulatory reform. The report gives the impression of the EU currently being ahead of the game, with the risk of being overtaken by the US and Asia.
That’s emphasized by a quote from European Commissioner adviser Peter Kerstens, “In the race to establish dominance in DLT, we don’t want Europe to become a flyover zone between the US and Middle East and Asia.”
The fragmented regulated regime could contribute. To date the EU has enacted two pieces of digital asset related regulation – MiCAR for crypto-assets including stablecoins and the DLT Pilot Regime for securities. The short term nature of the Pilot Regime and the low activity limits have dissuaded major institutions from participating. A senior Clearstream executive likened it to adapting an aircraft carrier for a few Cessna landings. Only two institutions have received approval so far. This limited uptake reflects broader concerns about the regime’s structure. EFAMA recommends raising the thresholds to encourage participation and greater liquidity in secondary markets.
The purpose behind the DLT Pilot Regime was to see what regulatory changes are needed, but EFAMA wants that accelerated. The CSDR requires listed financial instruments to use a central securities depository (CSD), and the DLT Pilot Regime introduces a slightly watered down version of this. EFAMA urges that trading should be allowed on platforms beyond the DLT Pilot Regime. Plus, it advocates for greater convergence between other regulations such as MiFID, EMIR, CSDR and the DLT Pilot Regime.
Beyond the DLT Pilot Regime
The asset management association has concerns that different national rules will reduce the potential efficiencies of digital assets. Hence, it wants to see UCITS and AIFMD requirements for the custody and administration of fund digital assets aligned with similar passages in MiCAR.
Amongst its other recommendations, it calls for regulatory clarity in Europe for tokenized collateral usage for margin requirements in derivatives trading and for repo. We’d note that Eurex already has the green light from BaFin for digital collateral and stateside, the derivatives regulator CFTC is involved in piloting tokenized collateral.
The paper is timely given the industry association notes that the European Commission is reviewing current legislation. It says the EC is “considering reviewing the DLT Pilot regime, the applicability of MiCA-regulated assets in the broader financial ecosystem, and determining how, in the longer term, the regulation of traditional finance (MiFID, CSDR) should converge with DLT-specific legislation, such as the DLT Pilot Regime.”
