Now that EU legislation has been adopted for a DLT Pilot Regime for securities and security tokens, the European Securities and Markets Authority (ESMA) is responsible for the regulatory aspects. It drafted an application form for organizations and institutions that want to participate in the Pilot and is inviting comments by 9 September 2022. The Pilot is not limited to regulated incumbents.
In June, the EU finalized legislation allowing new financial market infrastructures (FMIs) based on blockchain to be trialed. Specifically, the FMI can be a trading venue, a post-trade and settlement infrastructure, or the two combined.
The instruments that can be traded are equities, bonds or money market funds, and funds (UCITS), although there are financial limits outlined previously. For example, a maximum of €6 billion ($6.4bn) in securities can be issued on a single platform, and there’s a market capitalization limit of €9 billion ($9.6bn).
The law comes into force on 23 March 2023. Participants can be either existing regulated institutions or newcomers. However, they must comply with securities legislation with a few exceptions.
The ESMA application form
Regulated trading venues generally aren’t allowed to interact with retail customers and do so via intermediaries. But blockchain platforms are often open to all. Hence, that’s one of the exemptions that can be requested in the DLT pilot.
The other is compliance with MiFIR transaction reporting requirements. Instead, the trading venue can opt to provide the regulator with access to the blockchain for monitoring purposes. This is an illustration of a compensatory measure that is suggested for many exemptions.
To operate a post-trade and settlement infrastructure, there’s a long list of exemptions that can be requested, including regarding who is allowed to participate and settlement finality.
The application form is pretty extensive. It includes a business plan, legal agreements, the platform’s services, cybersecurity and whether the blockchain is permissioned, public or private.
Unsurprisingly apart from cyber risks, there are numerous questions about safeguards, risk management and investor protection.
Since the legislation was passed, there’s been an uptick in activity on the topic. A couple of big banks have selected custodians, including Societe Generale FORGE, the European trailblazer in security tokens. And this week, the Banque de France has said it wants to have a pilot wholesale central bank digital currency (CBDC) ready for the DLT Pilot Regime.