The EU’s DLT Pilot Regime came into force in March 2023, relaxing certain legislation to support DLT-based securities trading and settlement and allowing direct retail access to investments. It’s taken 19 months, but now the Central Securities Depository Prague (CDCP) is the first to have the official authorization to launch on November 18.
We’re aware of other platforms that are very close behind in the authorization process, so it remains to be seen whether CSD Prague is the first to launch. The Czech National Bank provided the authorization with notification from the European regulator ESMA.
There are three types of authorizations: for exchanges (DLT MTF), for settlement systems (DLT SS) and for platforms that combine both functions (DLT TSS). CSD Prague is a DLT settlement system.
Ondřej Dusílek, CEO of CDCP said the DLT approval “will contribute to the development of the capital market in our country, as this platform will bring alternatives for financing small and medium-sized companies through the subscription of bonds or shares without the need for additional intermediaries.”
Unlike a typical central securities depository (CSD) where only institutions have accounts, individuals can set up an account using a popular local identity solution, BankID. Each account can store digital bonds or shares either from primary issuances or transfers.
Individual and institutional participants
However, institutions can also participate and operate their own node on the network. These sorts of platforms will replace some of the solutions for managing cap tables.
“This platform will have a great added value for companies offering employee stock ownership plans (ESOPs) and also opens up huge opportunities for fintech companies such as crowdfunding platforms that can connect directly to DLT from the position of a node and offer their clients additional service in the securities field,“ said Mr Dusílek.
Notably, the platform supports transfers with or without cash settlement. However, in both cases it matches instructions from both parties. Without cash settlement, the transfer happens instantly. We’re guessing free-of-payment transfers will support crowd funding platforms and others that deal with the payment side directly.
For cash settlement, payment is to the account of CSD Prague, and it settles the transaction on receipt. The platform uses R3’s Corda enterprise blockchain.
To our knowledge, CSD Prague is one of the few incumbents that have applied for the DLT Pilot Regime. Most of the other applicants are startups, partly because the Regime’s volume restrictions are challenging for larger players. One of the incumbents, Clearstream, compared the DLT Pilot Regime to asking a military aircraft carrier to be adapted to land Cessnas, and even then only for one or two take offs. Financially, it doesn’t make sense.
Meanwhile, the UK recently opened its Digital Securities Sandbox to applications.
Update: added the use of R3’s Corda.
