The pilot regime agreed with the Council should help the financial sector to use transformative technologies while protecting investors and financial stability.
The project based on distributed ledger technology (DLT) follows the ‘sandbox’ approach, allowing for temporary derogations from certain requirements under the EU’s financial services legislation. The experience gained with the pilot regime should help to identify possible practical proposals for new rules on trading and settlement of transactions in financial instruments based on DLT.
Eligible financial instruments
Negotiators looked for a balance between allowing innovation and experimentation while preserving financial stability. They, therefore, decided that financial instruments services provided using the DLT market should be limited and subject to value thresholds, as follows:
- Shares (500 million euro)
- Bonds (1 billion euro)
- Corporate bonds (200 million euro)
- Units of collective investment undertakings (UCITS) (500 million euro).
Additionally, operators of DLT can admit new financial instruments only until their total market value reaches 6 billion euro.
DLT trading and security settlement and investor protection
Currently, there are no authorised financial market infrastructures using DLT to provide trading or settlement services for crypto-assets that qualify as financial instruments. Negotiators introduced the DLT settlement system and the DLT trading and settlement system, which should be able to cooperate with other market participants in order to test innovative solutions based on DLT. They will be exempt from certain rules that fall under financial services legislation, but the Parliament’s negotiators ensured that DLT market infrastructures and their operators should have in place adequate safeguards to ensure investors are effectively protected when using DLT. These safeguards will include clearly defined liability to clients for any losses due to operational failures.
To allow for competition, while preserving a level playing field and high standards of investor protection, as well as financial stability, new entrants should be able to access the pilot regime provided that they comply with the same requirements as authorised investment firms or market operators. Such requirements should be based on the service provided and on risks. Rules will be technologically neutral; operators of DLT market infrastructure will be required to comply with them irrespective of the technology used.
Finally, negotiators agreed that the operation of a DLT market infrastructure cannot undermine the EU’s climate policies. Development and investments in low- or zero-emission DLTs are therefore strongly encouraged.
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“DLT can bring a number of potential benefits in the provision of financial services, including reduced complexity, improved end-to-end processing speed, strengthened network resilience, and reduced operational and financial risks. The agreement struck on the DLT pilot regime should help to foster the development of successful DLT projects within the EU. At the same time we managed to build in sufficient safeguards to maintain financial stability, market integrity and a level playing field,” said the lead MEP Johan Van Overtveldt (ECR, BE).
Background
The European Commission’s Digital Finance Strategy aims to ensure that the European Union’s financial services legislation is fit for the digital age. The EU has a policy interest in exploring, developing and promoting the uptake of transformative technologies in the financial sector, such as blockchain and distributed ledger technology (‘DLT’). DLT comprises a diverse set of solutions that combine database technology and cryptography, which allows all information to be stored in a secure and accurate manner.