A few days ago, Regulation (EU) 2022/858 came into force, regulating a pilot regime for market infrastructures based on the distributed ledger technology (DLT). The Regulation establishes and regulates a temporary pilot scheme to enable market infrastructures operating with DLT technology to trade and settle crypto-assets transactions covered by financial services legislation.
DLTs are a computer technology that enables the operation and use of 'distributed ledgers', that is a database of transactions (but this could be any information) which, instead of being stored at a central hub, is distributed over a network of computers that allow information to be stored and accessible, manageable and verifiable, in a shared manner by entities operating via the Internet. The most common type of DLT is the 'blockchain', so called because transactions are grouped into chronologically linked blocks that form a chain. This chain forms the complete register of all transactions included in the database and is protected by mathematical algorithms that aim to guarantee information integrity and data security. This technology is susceptible to almost infinite modalities and applications in every sphere of human life where there is the need to guarantee the unchangeability and reliability of data or information, not only in the financial sector, without the traditional interference of a central institution that keeps and guards the information.
The DLT Regulation is part of the EU Commission's broader 'digital finance package', which includes, inter alia, two further parts of legislation (the proposed MiCA regulation on market in crypto-assets and the proposed DORA regulation on digital operational resilience for the financial sector), as well as the necessary amendment of existing directives.
This Regulation establishes a temporary regime for market infrastructures that operate through DLT in order to test such technologies and allow the development of crypto-assets that fall under the definition of financial instruments, while ensuring a high level of investor protection, market integrity, financial stability and transparency. This scheme will be subject to a 'review' in 2026, following a report on the functioning and risks of the pilot scheme by the Commission, which, on the basis of a cost-benefit analysis, will determine whether the pilot scheme can be extended (for a maximum period of three years), and/or extended to other types of financial instruments, amended, made permanent or abolished.
Among the most important innovations, the Regulation introduces the notion of a "DLT financial instrument" understood as financial instruments which are issued, transferred and stored on a distributed ledger and new, dedicated market infrastructures in which such instruments are traded. Moreover, only shares, bonds and fund shares are admitted to trading or may be registered in a DLT market infrastructure within the limits of thresholds identified both in relation to the issuer of the securities and the aggregate market value limits, in order to avoid financial stability risks.
As new technologies allow for real-time trading and settlement of transactions, the Regulation provides for an infrastructure combining the two activities alongside the traditional structures. The "DLT market infrastructure" includes, in fact, DLT multilateral trading facilities (DLT MTFs), DLT securities settlement systems (DLT SSs) and also DLT trading and settlement systems (DLT TSSs) that combine the traditionally separate activities of trading and post-trading into a single entity.
Access to the pilot scheme is not limited only to existing operators but is open to new operators under the authorization regime of the Regulation. To avoid and manage possible risks associated with the use of new technologies, operators will be subject to additional requirements compared to traditional players.
Among the most important innovations is the possibility, upon request of a DLT MTF operator, to obtain an exemption from the obligation of intermediation provided by MiFID II. Existing multilateral trading facilities are only authorized to admit investment firms, credit institutions and other entities, as members or participants, that have a sufficient level of trading capacity and expertise, and maintain adequate organizational arrangements and resources, so that non-professional investors do not have direct access to the markets. Instead, crypto exchange platforms offer disintermediated and direct access to non-professional investors. Accordingly, a temporary exemption from the obligation of intermediation has been introduced for operators of a DLT MTF, provided that adequate measures are in place to protect the investor, such non-professional investors meet certain conditions, and that the operator complies with any additional investor protection measures required by the competent authority. A similar exemption applies to central securities depositories (CSDs) operating a securities settlement system (DLT SS).
The Regulation shall apply from 23 March 2023.
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