With the Distributed Ledger Technology (DLT) Pilot Regime, an important project to renew the financial market infrastructure of the European Union has stalled, Christian Storck, Global Head of Capital Markets at Linklaters, says in an interview with the Börsen-Zeitung.

„Only four applications have been submitted so far, and little has happened in the sandbox so far,“ he says. In his view, this is partly due to the overly restrictive design of the Pilot Regime, which came into force in March 2023, making it unattractive for banks and trading firms.

With the legal framework, the EU Commission wants to create a basis for trading and settling DLT-based securities. In mid-October this year, the European Securities and Markets Authority (ESMA) allowed CSD Prague, a subsidiary of the Prague Stock Exchange, to use the new technology in settlement for the first time. A little later, the blockchain service provider 21X also received approval for trading (DLT TSS).

The EU Commission had already made it clear in the middle of the year that the pilot regime does not have a limited term. However, Storck is critical of the fact that it does not apply to large parts of the market, such as covered bonds, structured products, and proprietary trading. This inevitably leads to a lack of liquidity in the ecosystem, according to the Linklaters expert.

„In addition, the cash component is missing in settlement,“ he notes. „E-money tokens can be used, but only those issued by banks, and not by institutions that only have an e-money license.“ The entire regime is characterised by numerous unfavourable compromises that impair its effectiveness. „Especially now, with regard to the regulation developing in the USA, we should ensure that the trading volume increases,“ warns Storck. Otherwise, the intended competitive advantage for the European Union will be completely lost.

Bringing together trading and settlement on a DLT infrastructure could have a big impact. Storck hopes that the deficiencies in the pilot regime might be be remedied through subsequent regulation – and the USA could act as a catalyst.

The next brake on developments is now looming: With the premature end of the traffic light coalition government, the „Future Financing Act“ will probably no longer be passed. However, this is needed for the EU Markets in Crypto Assets (MiCA) Regulation for so-called grandfathering, bringing EU and German law line.

But only with the KMAG (Crypto Markets Supervision Act) can BaFin act as the national supervisor for German crypto custodians within the framework of MiCA, in order to enable passporting to other EU countries. "I do not expect the Financial Market Digitalisation Act to be passed before the federal election in February. That is unfortunate, as it is damaging Germany as a financial centre.”

On the other hand, the ECB trials for the settlement of securities via DLT infrastructure went smoothly. „It worked well. We accompanied the two KfW transactions and can say, on behalf of everyone involved, that the cash side can be represented wonderfully via the connection to the Bundesbank Trigger Solution, to run synchronously with the asset transfer - and that is exactly how it should be.“

Storck also highlights the first repo transaction carried out by Swiat as a DLT platform, with DekaBank and LBBW. Repurchase Agreements are a standard form of secured borrowing in the market, often involving fixed-interest securities. „The repo market is huge, and tokenisation could bring significant efficiencies in processing. This offers great scaling opportunities. You could also create your pool for managing collateral, a collateral hub for cross-border transactions that also harmonises legal aspects", says Storck.