EU’s DLT pilot will allow market operators to trade stablecoins before new crypto regulations

Quick Take

  • Participants in the European Union’s experimental sandbox for trading tokenized securities can trade in stablecoins before the bloc’s crypto regulation rules are enforced.
  • The pilot project offers exemptions from parts of existing financial service legislation.
  • Lessons from the pilot will inform future EU policy on DLT used in capital markets.

A European Union pilot program will allow market participants to use stablecoins for trades and settlements before the legal framework for crypto is enforced in at least two years, EU Commissioner Rok Zvelc said.

The plan, known as the DLT Pilot Regime, allows players from both traditional and digital finance to experiment using tokenized securities within a regulated environment.

So-called e-money tokens, which are single fiat currency-denominated stablecoins, are defined in the EU’s comprehensive Markets in Crypto-Asset regulation, known as MiCA. Those rules will only come into application in 2024 at the earliest, but the pilot participants will already be able to start using e-money tokens in trading and settlements within the DLT pilot.

"This is not something we need to wait for the adoption of MiCA for and its entry into force, but we can already use it. It is not defined in the DLT Pilot Regime but it is defined in MiCA, so it can already be interpreted in this way,” said Zvelc, who is a commissioner on the digital finance unit. He spoke during an online webinar hosted by the European Commission.

The DLT pilot allows players from both traditional and digital finance to experiment using tokenized securities within a regulated environment. The project, set to roll out in March 2023, will inform EU policy on DLT use in capital markets in the future.

Participants in the DLT project will be exempt from targeted parts of financial service legislation, such as the Markets in Financial Instruments Directive and The Central Securities Depositories Regulation, as part of the blockchain experiment.

Financial newcomers who are not licensed under MiFID and the CSDR will be able to apply to the DLT pilot by receiving a specific permission from financial supervisors. This means that crypto exchanges and service providers will have access to the sandbox without the requirement of complying to broader EU financial obligations that traditional institutions must follow.

There are no confirmed participants yet, but financial organizations like BNY Mellon have expressed interest.

After three years of the project running, one the European financial watchdogs, European Securities and Markets Authority, will produce a report that will decide whether the project will be terminated or continued.

ESMA cleared the way for the DLT Pilot Regime in September, when the financial supervisor decided it would not amend the existing rules on data reporting and transparency for the project.

MiCA and the DLT Pilot Regime are both part of the EU’s Digital Finance Strategy dating from September 2020.

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