On 25 June 2025, the European Securities and Markets Authority (ESMA) published its first comprehensive review of the Distributed Ledger Technology (DLT) Pilot Regime, a regulatory sandbox designed to test blockchain-based market infrastructure in the European Union. Although uptake remains modest, the review underscores the regime's potential to reshape trading and post-trading operations.
A Targeted Legal Framework Supporting Innovation
The DLT Pilot Regime, which became effective March 2023, allows operators of certain types of market infrastructure to experiment with DLT in a supervised, exempted environment. It establishes three categories of DLT market infrastructures (MIs):
- DLT multilateral trading facilities (MTFs)
- DLT settlement systems
- DLT trading and settlement systems
These DLT MIs can benefit from targeted exemptions under EU financial legislation, such as the Markets in Financial Instruments Directive (MiFID) and Markets in Financial Instruments Regulation (MiFIR), which govern investment firms including MTFs, as well as the Central Securities Depositories Regulation (CSDR), which governs securities settlement systems, enabling them to test innovative solutions while maintaining investor protection and market integrity. National competent authorities (NCAs) grant authorisation on a case-by-case basis, with ESMA providing technical guidance and coordination.
The regime is built on the principle of technological neutrality, ensuring that DLT-based models can be explored without compromising key regulatory safeguards.
Innovative Technology, but Fragmented Implementation
DLT MIs are allowed to deploy various blockchain configurations:
- Permissioned ledgers
- Consortium-based networks
- Public permissionless blockchains
DLT MIs often integrate smart contracts as well as automated validation and focus on transaction finality, data traceability, and operational resilience.
Despite the forward-looking framework, only three DLT MIs have been authorised so far: CSD Prague, 21X AG, and 360X AG. Trading activity remains low, but the momentum is building, especially among smaller issuers and developers of novel asset classes.
Challenges Identified by ESMA
The review identifies several technical and legal bottlenecks:
- Lack of interoperability with traditional financial infrastructure
- Limited access to central bank money, which hinders safe settlement
- Uncertainty around the long-term regulatory status of the regime
Additionally, ESMA highlights that existing thresholds — in terms of volumes, eligible assets, or participant profiles — are too restrictive to enable broader adoption.
Strategic Recommendations
To enhance the regime's effectiveness, ESMA proposes
- recalibrating thresholds to reflect the risk profile of different DLT business models,
- clarifying the regime's future status (temporary versus permanent), and
- enhancing technical engagement between regulators and market participants.
These recommendations align with feedback received from NCAs and the European Central Bank and complement the European Commission's public consultation on the DLT Pilot Regime as part of its savings and investments union initiative.
What Comes Next?
The European Commission is expected to publish its own report within three months of receiving the ESMA report. Possible outcomes include
- extending the DLT Pilot Regime,
- amending it based on lessons learned, or
- transforming it into a permanent regulatory framework.
ESMA has committed to issuing a follow-up report and continuing technical collaboration if the regime is extended.
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