EU tokenization companies are advocating for changes to the Distributed Ledger Technology (DLT) Pilot Regime to enhance its effectiveness and competitiveness, particularly in light of the growing momentum in the United States regarding digital asset regulation. The EU DLT Pilot Regime, which launched on March 23, 2023, was designed to allow market infrastructure operators to experiment with distributed ledger technology in the issuance, trading, and settlement of tokenized financial instruments. It aimed to address the limitations of existing EU financial services legislation that did not initially account for DLT and digital assets.
However, the initial framework has faced criticism for being too restrictive, narrow, and uncertain, hindering significant investment and broader adoption. Key concerns revolved around limitations on total issuance volume and restrictions on the types of eligible financial instruments. For instance, the initial limit of €6 billion in total issuance discouraged larger entities from participating.
In response to these concerns, the European Commission has proposed a major upgrade to the DLT Pilot Regime. The proposed changes aim to broaden the scope of eligible activities, increase issuance caps, and reduce procedural hurdles, especially for smaller platforms. A key proposal includes raising the total issuance threshold to €100 billion and permitting all MiFID II securities, not just stocks, bonds, and funds, to be tokenized. Another significant change is allowing Crypto Asset Service Providers (CASPs) to issue tokenized securities under the DLT Pilot Regime, introducing a two-tiered approach with a simplified regime for smaller DLT platforms issuing up to €10 billion. The proposal also removes the restriction that previously only allowed tokenized stocks for firms worth less than €500 million.
These proposed amendments reflect a pragmatic approach to foster innovation while maintaining regulatory oversight. The intent is to transform tokenization from a niche activity into a mainstream market pathway, promoting a more unified and efficient European financial market. The changes also seek to provide longer time horizons for businesses, fostering confidence in long-term planning and investment.
The evolving regulatory landscape in the United States is also influencing the push for changes in the EU. Some companies are looking to replicate their EU DLT framework in the US, taking advantage of current US legislation and exemptions. 21X, the first company in Europe authorized to operate a combined digital securities trading and settlement venue without a central intermediary, is pursuing a similar model in the US, leveraging meetings with the SEC and its Crypto Task Force.
The EU's DLT Pilot Regime is designed to run for at least three years, with the possibility of extension by the European Commission. If successful, it could lead to permanent changes in Union financial services legislation, establishing a single, coherent framework for digital assets. Companies like Axiology are already utilizing the DLT Pilot Regime to provide capital markets infrastructure, simplifying access to digital fixed-income instruments and tokenized securities. Axiology has introduced solutions for shareholder registry management using DLT and has established a Multilateral Trading Facility (MTF) for secondary market trading of tokenized fixed-income instruments.
The proposed upgrades to the DLT Pilot Regime are part of a broader package of legislative proposals aimed at creating a single market for financial services in Europe. This includes passporting regulated markets and Central Securities Depositories (CSDs), establishing a new Pan-European Market Operator (PEMO) status, and simplifying the launch of pan-European funds. The European Commission has also proposed that the European Securities and Markets Authority (ESMA) authorize, monitor, and supervise all CASPs, rather than national regulators.