Regulators from France and Italy suggest modifications to the Digital Ledger Technology (DLT) Testing Regime

Regulators from France and Italy suggest modifications to the Digital Ledger Technology (DLT) Testing Regime

In a bid to encourage larger financial institutions to participate and enhance the operational viability of projects under the DLT Pilot Regime, France and Italy have proposed significant changes. These modifications aim to address key barriers that have limited participation and adoption, particularly for larger entities.

One of the main changes is the removal or increase of the current €6 billion volume cap, which is considered too low to generate sufficient returns on investment for participants. This cap restricts the size of transactions, discouraging larger players from joining. Regulators and experts suggest creating a pathway to full uncapped adoption to attract more significant market participants while still managing risks due to the experimental nature of the technology [3].

Another key adjustment is the allowance of cash settlement using euro-denominated stablecoins licensed under the EU’s Markets in Crypto-Assets Regulation (MiCA), instead of restricting settlement to e-money tokens issued only by credit institutions. This change would make cash settlement more efficient and accessible on-chain, thereby enhancing the attractiveness of the regime, especially for projects that rely on stablecoins as a means of payment or settlement [3].

To provide regulatory certainty, the regulators also aim to clarify communication on the duration and future of the pilot regime. This move is intended to reduce uncertainty for potential participants [3].

These adjustments are designed to encourage participation from larger financial institutions and make the DLT Pilot Regime more competitive and attractive to a broader range of market participants [3]. The European Central Bank (ECB) and other national regulators backing these changes are also exploring interoperability and central bank money settlement on DLT platforms, which ties into broader efforts to integrate DLT-based systems with existing financial market infrastructures under clear legal and equal-access frameworks [5].

The DLT Pilot Regime, enacted in mid-2022 and effective from April 2023, has so far approved only two projects: CSD Prague for settlement and 21X as a combined exchange and settlement venue. 21X operates on a permissionless blockchain, but participants require permissions. For settlement purposes, 21X uses stablecoins or electronic money tokens (EMTs) [6].

The regulators also wish to develop common EU standards for interoperability with legacy systems and expand the range of assets supported in the DLT Pilot Regime to include structured bonds and some derivatives [7]. They suggest that an institution should not need a license as a Central Securities Depository (CSD) to qualify for a DLT Pilot Regime settlement license [7].

Retail investors can participate directly in 21X without going through a broker, and compensation is required if something goes wrong for retail investors in 21X [6]. The Savings and Investment Union is a priority for Europe, and it wishes to develop its financial markets to meet its financing needs. The regulators aim to promote the benefits of DLT to both issuers and investors [8].

The regulators propose 'greater proportionality' based on the scale of the project in the DLT Pilot Regime and the use of electronic money tokens (EMTs) and tokenized deposits could be authorized more widely in the regime [1]. Marie-Anne Barbat-Layani, AMF Chair, and Paolo Savona, CONSOB Chair, state that it is a priority to establish a competitive framework for DLT to better measure its potential benefits [2]. The statement by AMF Chairs was made in a paper about tokenization and CSDs [2]. The DLT Pilot Regime initially had a short-term nature, and AMF and CONSOB propose extending its duration and clarifying the exit process [4].

In conclusion, the proposed changes to the DLT Pilot Regime in France and Italy aim to make the regime more competitive and attractive to a broader range of market participants, including larger entities that have previously been concerned about volume limitations and settlement inefficiencies [3]. These adjustments are expected to foster innovation, market testing of distributed ledger technology, and the promotion of its benefits to both issuers and investors.

1. The DLT Pilot Regime is anticipated to foster innovation and market testing of distributed ledger technology, with the aim of encouraging broader market participation, especially from larger financial institutions.
2. To attract more significant market players, regulators are considering removing or increasing the current volume cap, currently considered too low to generate sufficient returns on investment.
3. With the proposal of greater proportionality, electronic money tokens (EMTs) and tokenized deposits could be authorized more widely in the DLT Pilot Regime.
4. To make cash settlement more efficient and accessible on-chain, the use of euro-denominated stablecoins licensed under the EU’s Markets in Crypto-Assets Regulation (MiCA) is now allowed for settlement instead of restricting it to e-money tokens issued only by credit institutions.
5. The European Central Bank (ECB) and other national regulators are exploring interoperability and central bank money settlement on DLT platforms, aiming to integrate DLT-based systems with existing financial market infrastructures under clear legal and equal-access frameworks.
6. Retail investors can participate directly in certain DLT projects, such as 21X, without going through a broker, and compensation is required if something goes wrong for retail investors in these projects.

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