Shearman & Sterling LLP | FinReg | EU Distributed Ledger Technology Pilot Regime Published
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  • EU Distributed Ledger Technology Pilot Regime Published

    The EU has published in the Official Journal of the European Union its Regulation on a pilot regime for market infrastructures based on distributed ledger technology. The pilot regime will permit certain DLT market infrastructures to operate with exemptions from some EU financial services legislation, which may otherwise inhibit the trading and settlement of crypto-assets. The regime is intended to promote legal certainty, support innovation, preserve market integrity and ensure financial stability for the use of DLT in crypto-asset and e-money token markets.

    The regime is targeted at DLT multilateral trading facilities (DLT MTFs), DLT settlement systems (DLT SSs) and DLT trading and settlement systems (DLT TSSs). Key aspects of the regime include:
    • Requirements for operating as a DLT MTF, DLT SS or DLT TSS;
    • Exemptions from existing financial services legislation, e.g., for DLT MTFs, from the obligation of intermediation under the revised EU Markets in Financial Instruments Directive (meaning retail investors could obtain direct access to DLT market infrastructures) and from transaction reporting requirements under the Markets in Financial Instruments Regulation. For central securities depositories operating DLT SSs, exemptions may be available from the rules on recording of securities, integrity of issue, segregation of accounts and book-entry form;
    • Restrictions on the types and value of financial instruments that may be admitted to trading on DLT market infrastructures, specifically shares, bonds and units in collective investment undertakings (provided, in the latter case, that they benefit from the execution-only exemption under MiFID II).

    Permissions will be granted by national regulators to DLT market infrastructures to operate within the pilot regime for a period of up to six years from the date the permission is granted. ESMA will be entitled to issue non-binding opinions on requested exemptions, to which national regulators must give due consideration and notify ESMA if they make any significant deviations from ESMA's opinion. The Regulation will come into force on June 22, 2022 and will for the most part apply from March 23, 2023.

    The pilot regime is part of the European Commission's 2020 EU Digital Finance Strategy, which also proposed regulations on markets in crypto-assets and digital operational resilience. The final versions of these pieces of legislation are yet to be published.

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