Investigating Digital Ledger Technology concerns within the context of the Capital Markets Union proposals by the European Commission
The European Commission has unveiled a regulatory approach aimed at breaking down barriers and promoting interoperability for permissionless blockchains in traditional finance. The proposed framework seeks to create a more flexible, market-responsive, and technology-neutral regulatory environment that supports the gradual integration of Distributed Ledger Technology (DLT) into mainstream financial regulation.
Key elements of this approach include addressing horizontal regulatory barriers, promoting interoperability, advocating technology-neutral regulation, supporting scalable settlement, and encouraging a risk-based, harmonized regulatory approach.
The Commission's strategy aims to reduce uncertainty and encourage institutional adoption of tokenized assets, fostering safer, more efficient markets. By standardizing data and enabling interoperability at both technical and regulatory levels, the approach can significantly reduce fragmentation, enhance liquidity, and support automation across traditional and blockchain-based financial systems.
The European Commission's proposal comes as it launches a consultation regarding the Capital Markets Union (CMU) that runs until 10 June. The consultation is part of the Commission's Savings and Investment Union (SIU) strategy and explores various aspects of multi-DLT interoperability.
The Commission is open to alternative routes for multi-DLT interoperability, considering three options: a Central Securities Depository (CSD) integrated with numerous blockchains, a technology company providing interoperability for regulated financial institutions, or a regulated entity providing an interoperability solution.
The consultation also raises questions about the limits on transaction volumes, the preferred connecting factor for transactions on a DLT system, and the permanence of licenses granted under the DLT Pilot Regime. The document includes many detailed questions about distributed ledger technology (DLT), with a whole section dedicated to permissionless blockchains.
The Commission's approach could facilitate a more seamless merger between legacy systems and next-generation decentralized technologies, potentially unlocking efficiencies in post-trade processing, settlement, and capital market operations overall. However, it's worth noting that only two institutions have received approval for the DLT Pilot Regime so far - 21X and CSD Prague - and larger institutions have shunned the regime.
The Commission's proposed framework could shape the European digital assets landscape for years to come, providing legal clarity while avoiding increasing the compliance burden. The consultation is an essential step towards creating a more integrated and efficient European financial market infrastructure.
[1] European Commission. (2021). A European approach to retail payments and opening up of payment accounts - Retail Payments Strategy. [2] European Commission. (2020). Report on the EU's DLT Pilot Regime. [3] European Commission. (2020). Fintech Action Plan: A European approach to boosting the competitive and technological edge of the EU's financial sector.
- The Commission's proposed regulatory approach for permissionless blockchains in traditional finance aims to encourage the tokenization of assets, providing legal clarity while avoiding increasing the compliance burden.
- The European Commission seeks to create a more flexible regulatory environment for Distributed Ledger Technology (DLT) that supports the gradual integration of DLT into mainstream financial regulation, fostering safer, more efficient markets.
- In the consultation regarding the Capital Markets Union (CMU), the Commission explores various aspects of multi-DLT interoperability, considering alternative routes such as a Central Securities Depository (CSD) integrated with numerous blockchains.
- By standardizing data and enabling interoperability at both technical and regulatory levels, the approach could significantly reduce fragmentation, enhance liquidity, and support automation across traditional and blockchain-based financial systems, potentially unlocking efficiencies in post-trade processing.
- As part of the Commission's Savings and Investment Union (SIU) strategy, the consultation raises questions about the limits on transaction volumes, the preferred connecting factor for transactions on a DLT system, and the permanence of licenses granted under the DLT Pilot Regime, providing insights into the regulatory future of digital assets in Europe.
