EU Commission intensively examines distributed ledger technology concerns within the context of the Capital Markets Union consultation
The European Commission has launched a consultation for the Capital Markets Union (CMU) strategy, exploring potential changes to the DLT Pilot Regime to boost its effectiveness and foster innovation in digital finance. Here are some key proposed changes:
Raising or removing the current volume cap
Industry experts argue that the €6 billion cap on transaction volume under the current regime is too low, hindering uptake and return on investment. The call for a pathway toward full uncapped adoption would encourage more meaningful experimentation and scale.
Settlement in euro-denominated stablecoins
Currently, only e-money tokens issued by credit institutions can be used for cash settlement. Permitting MiCA-licensed stablecoins would improve settlement efficiency and support the growth of European stablecoins.
Addressing communication issues
Clarifying the regime’s timeline and whether it will be extended or evolved could increase market confidence and participation.
The DLT Pilot Regime, initially set up for three years with a possible extension, is under monitoring by national authorities and ESMA. After the first period, ESMA will report on costs and benefits to inform any extension, amendment, or termination decision.
Permissionless blockchains in traditional finance
In November 2021, the European Commission published a report advocating for the use of permissionless blockchains in traditional finance.
Legal complexities of tokenization
The consultation highlights the legal complexities of tokenization, especially regarding which laws apply to a transaction. A complex example involves a buyer in Spain, a seller in Germany, a securities issuer in France, a secondary market in Italy, and a central securities depository in Belgium.
Interoperability options
The Commission is considering multiple options for multi DLT interoperability, including a CSD integrated with numerous blockchains, a technology company providing interoperability for regulated financial institutions, and a regulated entity providing an interoperability solution.
Regulating interoperability providers
The Commission is also considering regulating interoperability providers to ensure security, transparency, and compliance with regulations.
The consultation includes a five-page section dedicated to the DLT Pilot Regime and tokenization more broadly. The outcomes of this process could shape the European digital assets landscape for years to come.
Options for the connecting factor include the law chosen by the participants, the law chosen by the network participants, the law of the legal entity operating the DLT-based system, the domestic law of the State where the issuer is established, the place of the relevant operating authority/administrator, the primary residence of the encryption private master keyholder, and any other.
[1] European Commission (2021). "Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on a pilot regime for market infrastructures based on distributed ledger technology" [2] European Securities and Markets Authority (2021). "Guidelines on a pilot regime for market infrastructures based on distributed ledger technology" [3] European Commission (2021). "Consultation on the Capital Markets Union: A new strategy for the Capital Markets Union"
- Capital Markets Union strategy proposals suggest raising or removing the current volume cap on transactions under the DLT Pilot Regime to encourage more experimentation and scale, thereby fostering innovation in digital finance.
- The European Commission advocates for the use of permissionless blockchains in traditional finance, focusing on their potential to enhance security and transparency.
- Legal complexities concerning tokenization are a focus of the consultation, involving defining which laws apply to a cross-border transaction involving multiple countries and parties.
- The Commission is exploring multiple options for multi DLT interoperability, emphasizing the importance of maintaining security, transparency, and adherence to regulations in such interplay.
- Regulating interoperability providers is under consideration by the Commission to ensure that they promote an efficient, secure, and compliant European digital assets landscape for business and finance.
