Debate: Pilot regime for market infrastructures based on distributed ledger technology
Date: WEDNESDAY, 23 MARCH 2022
Speaker: Johan Van Overtveldt
Country: Spain
Language: EN

At the same time, digitalisation is rushing through the financial services industry, and to cope with this trend, it is not only vital to make existing financial legislation fit for digital, but also to show an openness towards new technologies that could make financial markets safer and more efficient. The digital finance package is an important milestone in that regard.  The technology that underpins crypto assets – the so-called distributed ledgers, or DLT – has a great potential for creative destruction and this will lead to productivity improvements. Its possible benefits in the provision of financial services include less complexity, strengthened network resilience, and reduced operational and financial risks. Currently, financial markets infrastructures are not authorised to use DLT to issue, trade, and settle financial instruments such as bonds, shares and exchange-traded funds. The DLT pilot regime aims at testing exactly that while also addressing associated risks.  The project fully fits the CMU objectives, helps us to keep on track in an evolving digital world and puts the EU at the forefront of innovation. During the trilogues Parliament held high six objectives or principles. First, innovation. We followed a ‘sandbox’ approach, meaning that we allow for temporary and conditional exemptions from current legislation. The experience gained that way should foster innovation further.  Secondly, market integrity. The existing Market for Financial Instruments Directive and the Central Securities Depositories Regulation apply in a traditional, account-based environment. To ensure adequate regulatory and supervisory requirements for this regime, we checked in detail which rules from both pieces of legislation would also be essential for application in a DLT environment.  Third principle: investor protection, which I think speaks for itself.  Fourth element: financial stability. Our feeling was that the initial commission proposal was a bit too lenient on financial stability safeguards, as provided for in the CSDR. We have significantly strengthened these safeguards.  Fifth: level playing field. Providing equal opportunity to all market players is a fundamental principle of EU legislation.  And the sixth and last of the objectives was of course technological neutrality.  As a final remark, I would like to address our successors as co-legislators with a few words of caution for the longer term. What works in a limited testing environment does not necessarily work in a broader context. If the project turns out to be successful, simply expanding its scope and changing the permanent regulatory framework for financial services accordingly might create risks that are not noticeable or that were not noticeable in the pilot phase.  Secondly, future co-legislators should thoroughly scrutinise the exemptions granted under the pilot project before upscaling them. This is notably the case for possible risks linked to settlement in commercial bank money.  Thirdly, the Parliament negotiating team would also have liked a stronger role for ESMA as a central supervisor of the DLT pilot regime, but that turned out to be a no-go for the Council negotiators. Let me, to finish, express my thanks to all involved in the file: the shadow rapporteurs, particularly Jessica Polfjärd, Eva Kaili, Stephanie Yon-Courtin and Ernest Urtasun; the Slovenian Presidency; the European Commission, particularly Commissioner McGuinness; and of course the parliamentary services.