EU financial regulator braces up for tokenized securities pilot

Quick Take

  • The European Union’s financial markets regulator published a set of guidelines to prepare market participants for the DLT Pilot Regime starting in March.
  • Criminal record checks and proven knowledge of the sector are among the non-binding but heavily suggested recommendations.

The European Union’s financial regulators are laying out guidelines preparing market participants on how to operate in a tokenized securities sandbox. The EU will launch a pilot for market actors to experiment using financial instruments based on decentralized ledger technology (DLT) in March. 

The DLT Pilot Regime will give both traditional finance players and newcomers, like crypto firms, the opportunity to use the decentralized technology for an innovative market infrastructure that removes intermediaries. The European Securities and Markets Authority (ESMA) will have a role in overseeing the project.

To take part in the sandbox, ESMA suggests in a report published on Thursday that applicants should provide a criminal record for laws concerning the financial sector, securities or payments as well as “money laundering and terrorism financing, fraud, financial crime, bankruptcy or insolvency.” Personal debt or bankruptcy would also affect the “good repute” required to participate. 

Experience in the sector is also a must. The regulation on the DLT Pilot Regime from the EU institutions already specifies that participants need to have “ability, competence, experience and knowledge” of the technology. ESMA suggests that applicants will need to prove expertise of “education, training, professional experience” with the technology.

Participants are also encouraged to share their take-aways from the Pilot to their national authorities. This could inform improvements to the regulation on the project.

ESMA consulted 10 investment firms, trading venues, and central securities depositories to come up with the guidelines. While they are not mandatory, participants are strongly encouraged to follow them. The guidelines will come into force on March 23, ESMA said in its release, aligning with the launch of the sandbox.

The financial markets regulator previously cleared the way for the DLT Pilot in September with a previous report. 

The DLT Pilot is part of the EU’s 2020 Digital Finance package. The bloc’s landmark Markets in Crypto-Assets regulation, set to come into force in 2024, sits in the same legislative pod. 


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