The European pilot regime law entered into force on 23 March 2023. Its aim is to develop the market for financial securities on blockchain as part of an EU-wide experiment lasting three years, with the possibility of another three-year extension.
Some European legislators have already offered local clarification about circulating unlisted securities that use distributed ledger technology (DLT). This is the case of France with the Decree of 8 December 2017, referred to as the “Blockchain decree”, which allows financial securities to be recorded and transferred on an electronic recording system.
“The idea behind this decree was to create a framework for developing solutions that involve this new technology, while providing legal security for fund units, unlisted financial securities and negotiable debt securities”, says Fanny Thomas, Head Of Legal – Client Agreements at CACEIS.
The Pilot regime, which organises the handling of DLT-based unlisted securities at a European level, has the same goal and removes the regulatory obstacles that had been preventing such usage, while maintaining the security and harmonisation of European law.
“By widening the possibility and legality of circulating unlisted securities using DLT, the Pilot regime should lead to an increase in the tokenisation of financial securities”, adds Fanny.
Eliane Meziani, Senior Advisor-Public Affairs at CACEIS, stressed: “However, it is premature to imagine asset managers and investors rushing to take advantage of this regulation given the lack of experience in trading crypto-assets classed as financial instruments, and in related post-trade services”.
As an asset servicer, CACEIS listens to the market’s expectations. “Participants have questions about many legal issues, and that’s normal with an experiment. Questions regarded investment in tokenised financial instruments as well as their custody, especially for investors concerned by access to funds investing in tokenised financial instruments’”, Eliane adds.
Relevant scenarios, which will soon emerge during the trial period, will no doubt enable market participants to answer these questions and weigh up the benefits of the pilot regime. They will also give asset servicers an opportunity to flesh out their related service offering.
Although the first incompressible deadline of three years may seem long given the perpetual innovation behind blockchain, it is necessary for the temporary regime to become operational.
This period should see the emergence of delivery versus payment on blockchain (DVP on chain) with an acceleration of the work of the European central banks at the country level and of the Eurosystem on Eurodigital.
“The success of the pilot regime depends on participants’ enthusiasm for experimenting with issues and transactions in sufficient volumes, and on their ability to share their transformative view with the whole market”, Eliane concludes.