In March 2023, the EU DLT Pilot Regime begins, which allows regulated tokenized securities to be traded using blockchain technology. While the sandbox supports some regulatory exemptions (see footer), it does have financial limits. Market participants are concerned about these currency caps, the potential six-year duration of the sandbox, and uncertainty about what will happen at the end.

DLT limits are a problem for big gamers

There are few capital market players larger than BNY Mellon, the world’s number one global custodian with $43 trillion in assets under custody and management. While very supportive of the goals of the DLT pilot regime, Benjamin Duve of BNY Mellon has reservations. “The real problem for us and a lot of the other bigger players in the market is that if you look at the limits – who can issue, how much can they put into the system – the limits can be reached in a matter of days. Or most of our clients cannot be served,” Duve said.

Under EU law, any distributed ledger platform is capped at a total volume of €6 billion ($5.9 billion) of securities issuance or a market capitalization of €9 billion ($5.9 billion). $800 million). In addition, any issue is capped at €500 million for shares (the company’s market capitalization) and funds and €1 billion for bonds.

“So the question is, where am I going with this? Do I try to use technology in a compliant way outside of the Pilot Regime to build truly scalable solutions?” He raised the concern of fragmented liquidity pools.

Duve added that because of the limits, it is difficult to use the pilot regime “to really change (how) the global capital markets or the European capital markets work.” He wanted to see financial limits based on the size of the participants.

The BNY Mellon tokenization leader also had concerns about what will happen at the end of the Pilot Regime. Although innovation is encouraged during the pilot, it could be more restrictive and highly regulated when it ends.

Kurt Zeimers of BNP Paribas agreed with Duve regarding limits and concerns about what happens in the end. However, he added, “if we do not participate in the Pilot Regime, we will never have a change in article 3 of the CSDR”, which requires entries in the books of the central securities depository. He sees participation as a way to demonstrate the need for change.

ESMA, the regulator, also reviews progress and may take industry feedback into account. However, it was clear that the industry had weighed in on the cap issue before the legislation was passed.

Too little, too late, too long?

Simon Seiter believes that the pilot scheme is too small, too late and too long, especially for the big capital market players. Seiter works for the German private bank Hauck Aufhäuser Lampe and was Head of Digital Assets at Deutsche Börse until the end of last year. He thinks that the limits of the Pilot Regime can work well for investment platforms.

“I would like to have a Regime” instead of a Pilot, Seiter said. “What you build in the sandbox works in the sandbox, but not in the real world. If you have to build it for the real world, it works differently than the sandbox.”

But not everyone is unhappy with the pilot DLT regimen. SWIAT, a regulated digital instrument technology solution started by DekaBank, is happy with it.

Max Heinzle, the CEO of Startup 21.finance, which is building a trading platform, is delighted. “Where in the world do we see a form of legal framework that has this disruptive potential to disintermediate at the DLT Pilot Regime level that allows for atomic matching and agreement,” he said.

Exemptions from the DLT Pilot Regime

As background, the key exemptions in the DLT Pilot Regime are that a single DLT platform can support the issuance, trading, settlement and custody of securities. It also allows market infrastructures to serve customers directly without intermediaries.