The European Union DLT Pilot Regime (Regulation (EU) 2022/858), which has an implementation date of March 23, 2023, represents a significant step forward in the use of distributed ledger technology (DLT) in the European financial services sector.
Considerations
The EU is proving a friendly regulatory environment for innovative financial use cases involving DLT. Its DLT Pilot Regime redefines the relationship between technologies or programming, on one hand, and the need for protection of investors and system resilience on the other. This should improve trading efficiency as well as introduce new pre-and post-trading opportunities as investors and issuers shift operationally toward market infrastructures.
The DLT Pilot Regime establishes a pan-European framework for regulatory dialogue to increase legal certainty for innovative and distributed high-tech solutions. The goal of the European DLT Pilot Regime is to facilitate cross-border dialogue with and between regulators and market players. During these dialogues, use-case developers can present their business case for receiving legal guidance from regulators.
This intervention aims to support digital development of the financial market and introduce regulatory solutions that will bring a competitive advantage to Europe through the establishment of firms specialized in structuring trading venues that operate through the application of DLT. This also ensures public control regarding offshore infrastructural alternatives that today compete with credit institutions and other supervised entities.
In brief, the EU internal market regulation sets two paradigms:
- Traditional activities, financial services and venues taken into consideration by MiFID regulations
- Services referable to distributed registries, the issuance of digital financial instruments, the operation of multilateral settlement and trading systems indicated by the aforementioned Regulation (EU) 2022/858
Takeaways
We believe that fintech firms and supervised entities should carefully monitor how technology, market practices and regulation across Europe evolve, especially in those jurisdictions where DLT business will be most active.
Once implemented, DLT products will open the door to more cross-border and digital business, given the opportunity to tokenize shares and debt.
Our Dentons European Fintech team is perfectly equipped to support clients, and we are pleased to present our DLT Pilot Regime Tracker. It offers a comparative study of the status of implementation of the Directive across various EU jurisdictions, giving you a clear overview of the current regimes in place during this transition period.