What is the EU blockchain pilot regime for securities tokens? And why should asset managers care?
A new blockchain pilot regime could open doors for many in the finance industry, including asset managers. Our project lead, Hubert Grignon Dumoulin explains what it is, and what it could mean for your asset management business.
What’s the EU’s blockchain pilot regime?
The securities token and post-trade regime could be a game-changer for securities market functioning, and consequently for investment funds.
If the regulation goes through, then exchanges, CSDs and fintechs will be able to experiment with new and potentially vastly improved models for trading funds: namely via digital exchanges or market infrastructure facilities dealing with tokenised securities. This could allow for huge efficiencies, bringing down the cost of investing (and offering investment funds) to record levels.
The idea of digital exchanges has been around for some time, but innovators need this legislation rubber-stamping before launching operations.
GOOD TO KNOW
The pilot regime is just one of a raft of new regulations that make up the Digital Finance legislative package.
This package includes proposals for regulations on the:
· Market in Crypto-Assets (MiCA);
· Digital Operational Resilience for the EU financial sector (DORA); and
· Pilot DLT Market Infrastructure Regulation (PDMIR)
It’s the latter proposal, the Pilot DLT Regime, that could be a game-changer for securities market functioning and consequently for investment funds..
Why should asset managers care about the regime?
To put it simply, new trading models will appear that:
lower the cost of raising new funds significantly, by cutting out the middle men; and
give asset managers access to a brand new clientele: self-directed retail investors motivated by reduced costs or the opportunity to trade peer-to-peer.
Up until now, models featuring security tokenisation could have appeared in individual countries, but - as national rules differ widely - it simply wouldn't have been possible to distribute and trade funds across borders.
This new sandbox environment for Europe means that that companies can experiment with DLT issuance without butting their heads against conflicting national rules: excellent news for such an international industry.
Is the pilot regime likely to go ahead?
We're edging closer and closer to the regime being officially adopted. The regime sailed through the European Parliament and European Council reviews, and the next step is a fast-tracked procedure through the three European Institutions..
All the signs are positive from the European Council, at least. Member States proposed five key amendments to the legislation proposal that indicate significant support for a sandbox regime.
FIVE POSITIVE AMENDMENTS TO THE EU BLOCKCHAIN PILOT REGIME
At the end of June, the Council agreed on a general approach to securities token trading that included these five key positive amendments to the regime.
Possibility to trade all financial instruments The Council wants all financial instruments to be traded on the blockchain, rather than just certain securities. Even derivative instruments, including securitised derivatives, will be part of that sandbox regime (if Parliament agrees). It will also be possible to trade sovereign bonds and UCITS on the blockchain.
Open to new entrants
The Council wants new entrants to be able to open exchanges under the new DLT regime. The initial legislation proposal only allowed for incumbents.
Bigger issuance sizes and values
The Council has suggested doubling the thresholds on issuance sizes and values that the Commission initially proposed for digital exchanges. This will allow more liquid markets to develop.
Permissionless blockchains authorized
The Council has proposed allowing digital exchanges to be built on permissionless blockchains, as well as the permissioned blockchains proposed by the European Commission.
Trading and post-trading combined
The Council would allow digital exchanges to provide both trading and post-trade services, and similarly digital CSDs will be allowed to provide trading services which would establish a level playing field.
The potential that this regime represents is huge. The double whammy of reduced costs and new clients could reinvigorate the asset management industry as new growth opportunities are encouraged to bloom. No-one knows when the big day will come and new trading venues will be able to open. But companies like ours, Investre, are already building the technology to allow asset managers to reap the benefits of the new legislation. We're all looking to a bright future ...