Last month the US Securities and Exchange Commission (SEC) provided a no-action letter allowing the DTC to tokenize securities. This is one of multiple paths that the SEC is likely to permit in the US. While some question the need for a central securities depository (CSD) in a tokenized future, the European Commission proposed reimagining the structure of a CSD in a more distributed fashion.
Under the current DLT Pilot Regime, the EU allows a trading and settlement venue for tokenized digital assets to be run by a single entity, as in the case of 21X where a trade is negotiated, executed and settled on chain. Now the European Commission proposes decentralizing the functionality of a CSD in two ways. One option is for a group of banks to control a “settlement scheme”, without a single entity in charge. The other path explores splitting up the functions of a CSD. Separate companies can be responsible for the notary and account keeping functions, while the settlement of trades still needs to take place on CSDs or DLT-based Settlement Systems (SS).
This latter approach may be new at the pan European level, but similar laws have already been enacted by several EU member states for securities issued on distributed ledgers. Germany’s eWpG law has the concept of a “registrar” for crypto securities; Luxembourg’s Blockchain Law 4 provides for a “control agent” for the issuance of digital securities; and Italy’s FinTech Decree defines a “registry manager”. In all cases secondary market trading still requires settlement via a CSD or SS to comply with current European legislation. Given this precedent, it is the distributed bank-controlled settlement system that appears more novel and hence deserves more attention.
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