Luxembourg and the EU have taken an important step forward in the area of blockchain and Distributed Ledger Technology (“DLT”). With a view to removing regulatory hurdles to the issuance, trading and post-trading of many financial instruments for which an EU regulatory framework already exists (such as the regulation of transferable securities, units in collective investment undertakings and derivatives under MiFIR, MiFID II and CSDR^[2]), the EU has put in place the DLT Pilot Regime through Regulation (EU) 2022/858 of 30 May 2022. The new DLT Pilot Regime applies (with certain limitations) to all (traditional) financial instruments within the meaning of MiFID II^[3] that are issued, recorded, transferred and stored using blockchain or distributed ledger technology (“DLT Financial Instruments”).

The DLT Pilot Regime introduces three categories of DLT market infrastructures, exclusively for DLT Financial Instruments (together, the “DLT MIs”): DLT Multilateral Trading Facilities, DLT Trading and Settlement Systems and DLT Settlement Systems. The DLT Pilot Regime constitutes an EU-wide regime, prevailing over any existing national law.

The DLT Pilot Regime is an optional regime. It is open, on the one hand, to market participants already holding an authorisation as a regulated entity. These participants need to apply for an extension of their existing authorisation and can request certain exemptions with respect to DLT Pilot Regime-related activities.

On the other hand, the DLT Pilot Regime is open to new entrants without any EU authorisation. These new entrants can either apply for both an authorisation under the existing EU regulatory framework and apply for an authorisation to operate a DLT MI; or the new entrants can limit their application solely to request a temporary authorisation to operate a DLT MI.

Rather than complying with all applicable EU financial regulations, DLT MIs can request limited exemptions for up to six years, provided they comply with the conditions attached to those exemptions and any compensatory measures as requested by the relevant competent authority.

The European financial sector supervisory authority (ESMA) has recently issued guidelines on standard forms, formats and templates to apply for permission to operate a DLT MI.

Luxembourg’s legislature is preparing for the start of the DLT Pilot Regime by including DLT financial instruments in relevant local laws (the financial sector law of 5 April 1993, as amended; the law on markets in financial instruments of 30 May 2018, as amended; and the law on financial collateral arrangements of 5 August 2005, as amended).

By providing limited exemptions to new entrants using blockchain or Distributed Ledger Technology, the EU has demonstrated a genuine desire to support financial services innovation, while at the same time ensuring that investors and markets are appropriately protected.

Maxime Barthez also contributed to this article. 

FOOTNOTES

[¹] Dr. Boeing is a finance and regulatory Fintech partner in K&L Gates’ Luxembourg office. He is assisted by Trainee Maxime Barthez.

[²] These are all well-established EU directives and regulations in the financial services arena. MiFIR refers to Markets in Financial Instruments Regulation (EU) 600/2014; MiFID II refers to Markets in Financial Instruments Directive 2014/65/EU; CSDR refers to Central Securities Depositories Regulation (EU) 909/2014.

[³] As listed in part C of Annex I to MiFID II.