Regulatory bodies in France and Italy propose modifications to their Digital Ledger Technology (DLT) Experimental Regime

Regulatory bodies in France and Italy propose modifications to their Digital Ledger Technology (DLT) Experimental Regime

The Digital Ledger Technology (DLT) Pilot Regime, enacted in mid-2022 and effective from April 2023, has seen the approval of only two projects so far: CSD Prague for settlement and 21X as a combined exchange and settlement venue. However, recent proposals aim to make the framework more appealing, particularly to larger entities.

The French and Italian regulators, along with EU authorities, are pushing for changes that focus on increasing or removing the volume cap, allowing cash settlement with euro-denominated stablecoins licensed under MiCA, and clarifying the regime’s duration and communication.

The current €6 billion size cap on transaction volume is seen as too low for participants to achieve meaningful returns on investment. The proposal suggests creating a pathway towards full uncapped adoption, allowing participants to operate at scales that justify their investment and attract bigger market players.

The use of European stablecoins for on-chain cash settlement would improve efficiency and support the development of EU-based stablecoins, appealing to a broader range of users, including larger financial entities. This change would enable the use of stablecoins for settlement purposes, as seen in 21X, which operates on a permissionless blockchain but requires permissions for participants.

Better clarity and extended timelines or transition pathways would provide regulatory certainty, a priority for larger firms before committing resources. The objective is to avoid the EU becoming a "regulatory fly-over zone" for digital assets, staying competitive versus US and Asian markets which have more progressive and scalable DLT regulations.

The regulators also propose expanding the range of assets supported under the DLT Pilot Regime to include structured bonds and some derivatives. They suggest developing common EU standards for interoperability with legacy systems.

Marie-Anne Barbat-Layani, AMF Chair, and Paolo Savona, CONSOB Chair, have emphasized the need for rapid support for the central bank money settlement solution and the establishment of a competitive framework for DLT innovation. Some of these suggestions were previously made by AMF in a paper about tokenization and Central Securities Depositories (CSDs).

The regulators aim to promote the benefits of DLT to both issuers and investors. They believe that extending the duration of the DLT Pilot Regime and clarifying the exit process will help attract larger entities. For settlement purposes, 21X uses stablecoins or electronic money tokens (EMTs), which requires waiving certain rules regarding finality of settlement.

21X allows a single entity to manage both the trading and post-trade infrastructure. Retail investors can participate directly in 21X without going through a broker. These changes, if implemented, are expected to help better measure the potential benefits for Europe’s financial markets.

1. The French and Italian regulators, along with EU authorities, are advocating for changes in the DLT Pilot Regime to make it more appealing to larger entities, including the increase or removal of the transaction volume cap, allowing cash settlement with euro-denominated stablecoins licensed under MiCA.
2. The proposal suggests creating a pathway towards full uncapped adoption, allowing participants to operate at scales that justify their investment and attract bigger market players, as the current €6 billion size cap is seen as too low for participants to achieve meaningful returns.
3. The use of European stablecoins for on-chain cash settlement would improve efficiency and support the development of EU-based stablecoins, appealing to a broader range of users, including larger financial entities.
4. Better clarity and extended timelines or transition pathways would provide regulatory certainty, a priority for larger firms before committing resources, and help attract larger entities, as suggested by Marie-Anne Barbat-Layani, AMF Chair, and Paolo Savona, CONSOB Chair.
5. The regulators are also proposing expanding the range of assets supported under the DLT Pilot Regime to include structured bonds and some derivatives, and developing common EU standards for interoperability with legacy systems.
6. 21X, which operates on a permissionless blockchain but requires permissions for participants, uses stablecoins or electronic money tokens (EMTs) for settlement purposes, and allows retail investors to participate directly without going through a broker, which if implemented, are expected to help better measure the potential benefits for Europe’s financial markets.

Read also: