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DLT Pilot Regime: A Framework for DLT Market Infrastructures

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1. Context and scope

On 2 June 2022, Regulation (EU) 2022/858 of the European Parliament and of the Council on a pilot scheme for market infrastructures based on distributed ledger technology (“DLT“) was published in the Official Journal (the “Regulation”). The Regulation aims to provide entities that operate DLT-based securities trading and settlement systems (“DLT market infrastructures”) with a set of rules adapted to crypto-assets qualified as financial instruments within the meaning of Directive 2014/65/EU (“MiFID II”). The Regulation further allows such entities to be exempted from a number of requirements that would normally apply to them under the existing European Union (“EU”) guidelines or regulations.

The DLT market infrastructures covered by the regulation include[1]:

  • DLT Multilateral Trading Facility (“DLT MTF”): a multilateral trading facility which only admits the trading of DLT financial instruments;

  • DLT settlement system (“DLT SS“”): a settlement system that settles transactions in DLT financial instruments against payment or against delivery, allowing the initial registration of DLT financial instruments or the provision of custody services in relation to DLT financial instruments; and

  • DLT trading and settlement system (“DLT MES”): an MTF DLT or SS DLT that combines services performed by an MTF DLT and an SS DLT.

In addition, crypto-assets that do not qualify as financial instruments within the meaning of MiFID II (e.g. stablecoins or electronic money tokens) will be covered by the regulation of crypto-asset markets (also called “MiCAR”) ) , which is still under discussion at EU level.

2. Main highlights

(a) Limits

The regulation only applies to certain DLT financial instruments, that’s to say those that are non-complex (equities, debt securities, mutual fund shares) and of limited aggregate market value[2].

(b) Specific Authorization

Authorized financial institutions (such as investment firms, central securities depositories and market operators) may apply for specific authorization to operate as a DLT market infrastructure under the Regulation[3]. The status of DLT market infrastructure is however optional[4].

The operating authorization will be valid throughout the European Union[5]. It will only be granted on a temporary basis, for a period of up to six years and valid only for the duration of the pilot scheme.

(c) Waivers

An operator of a DLT Market Infrastructure may apply to be exempted from certain otherwise applicable regulatory requirements, provided that it meets all the conditions set out in the Regulation. Indeed, certain requirements arising from other applicable texts may not be adequate and could thus prevent these operators from developing solutions for trading and settling transactions on crypto-assets qualified as financial instruments.[6].

(d) Additional Requirements

Operators of DLT market infrastructures will have to comply with a number of specific requirements set out in the regulation, and will therefore have to among others:

  • establish clear and detailed business plans describing how they intend to carry out their services and activities;

  • establish or document rules for the operation of the DLT they use;

  • provide their members, participants, issuers and clients with clear and unambiguous information on their website about how they carry out their functions, services and activities and how their performance differs from that achieved by a multilateral trading facility or a securities settlement system that is not based on DLT;

  • ensure that all computer and cyber devices related to the use of the DLT are proportionate to the nature, scale and complexity of their activity;

  • prevent, where appropriate, the use of members’, participants’, issuers’ or clients’ assets (funds, guarantees or DLT financial instruments) for own account without the prior express consent of the party concerned;

  • maintain safe, accurate, reliable and retrievable records of assets; and

  • establish and make available to the public a clear and detailed strategy for reducing the activity of a particular DLT market infrastructure, transitioning or abandoning it in certain circumstances (a “transition strategy”).

(e) Cooperation Requirements

In order to allow competent authorities in the EU to gain experience of the impact of DLT and to understand whether changes to the current financial legislation would be necessary, operators of DLT market infrastructures are required to submit reports regularly to their competent authorities. In addition, the framework and its functioning will be subject to frequent monitoring and evaluation.

3. Timeline and next steps

Most of the provisions of the DLT pilot scheme regulations will apply from March 23, 2023.

Three years from the date of application of the regulation, the European Securities and Markets Authority submits a report to the Commission containing its assessment of the pilot scheme. On this basis, the Commission presents a report to the European Parliament and the Council, analyzing whether this temporary regime should be extended (in time and/or to other types of financial assets), modified, made definitive or abolished. If the pilot scheme is successful, it could be made permanent by amending EU financial services legislation to establish a single, coherent framework[7].