ESMA outlines DLT pilot challenges

Europe’s securities regulator ESMA has written to the European Commission, Parliament and Council to explain the underwhelming progress of its DLT Pilot Regime.

The project was launched just over a year ago with the aim of providing legal certainty over the use of blockchain technology and encouraging greater involvement from issuers and investors as well as established market infrastructures.

However, 12 months on, no infrastructures have been authorised to participate in the pilot, although four applications have been submitted.

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So rather than issuing the progress report mandated by the terms of the pilot, ESMA has instead detailed the progress of various applications received so far.

The regulator added that a further eight applications are expected to be made this year.

The letter from ESMA also outlined a number of challenges around the use of DLT. These include performing settlement where no traditional cash is involved and regulatory expectations relating to custody provision.

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Another issue is the use of volume limits, which dissuades larger participants.

ESMA has also called on the EC to look at encouraging greater interoperability between DLT-based and traditional market infrastructures and to confirm that the pilot regime will be extended beyond its current 2026 endpoint.

The extension would “send a signal to market participants that they have sufficient time to implement and operate their projects, making the required investments worthwhile for them,” stated ESMA.

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