EU DISTRIBUTED LEDGER TECHNOLOGY CALL FOR EVIDENCE

EU - Finance

The European Securities and Markets Authority's ("ESMA") call for evidence from stakeholders in Distributed Ledger Technology ("DLT") closes on 4 March 2022 after two months' worth of submissions. The evidence will be reviewed as part of the DLT Pilot Regime in preparation for potential changes to the technical standards of the current Markets in Financial Instruments Regulation.

Key date(s)

• 24 September 2020: European Commission publishes proposal to launch pilot scheme to regulate Distributed Ledger Technology in the financial market.
• 24 November 2021: Political agreement on draft regulation adopted between the Presidency of the Council and European Parliament.
• 21 December 2021: EU ambassadors endorse agreement.
• 13 January 2022: European Parliament's Committee on Economic and Monetary Affairs votes on draft legislation.
• 4 March 2022: Window closes for ESMA-requested stakeholder submissions on the technical standards of the Markets in Financial Instruments Regulation and their suitability for the new pilot regime.
• Early 2023: new regulatory technical standards expected to come into force.

Status

• The technological infrastructure of Digital Ledger Technology ("DLT") is decentralised across a peer-to-peer network, allowing it to slip through the cracks of current financial legislation which was created with traditional financial trading in mind. The DLT Pilot Regime (the "Regime") was proposed by the European Commission on 24 September 2020 in response to the growing market presence of DLT trading and an agreement (the "Agreement") on its drafting was adopted between the Council Presidency and European Parliament.
• From 4 January to 4 March 2022, the ESMA called for evidence from stakeholders to inform its assessment of whether the current regulatory technical standards ("RTS") developed under the Markets in Financial Instruments Regulation ("MiFIR") will be effective in regulating DLT as well as traditional financial trades.
• If necessary, new RTS are likely to come into effect in early 2023 which has driven the ESMA to call for stakeholder submissions on the Regime so soon after the Agreement which has not yet been finalised. If the 2023 deadline is followed and the request for submissions finds that the current MiFIR is inadequate for DLT regulation, this will leave little time for consideration of RTS changes before their implementation.

 What it hopes to achieve 

• ESMA has gathered stakeholder feedback on the current MiFIR pre- and post- trade RTS for transparency and data requirements. Once the submissions have been collated, a decision will be made as to the effectiveness of the current RTS with regard to DLT regulation. If the ESMA deems amendments necessary, it will consult the public and publish a consultation paper before submitting the changes to the European Commission. If the process follows this path, the amendments should be implemented by early 2023 which will significantly change the regulation of the financial market in less than a year's time.

Who does it impact? 

• If changes are made to MiFIR RTS, this will impact numerous stakeholders in the DLT market. Financial market regulators across the EU will need to change their practices to encompass DLT activities. For many regulators, this will require new technological know-how and employee capacity, which could prove costly and time-consuming.
• Changes might affect the interfaces used by individuals to trade, but it will likely have a greater effect on the networks which provide wallets and facilitate exchanges. These networks may face new disclosure duties along with other as of now unaddressed responsibilities. However, the nature of RTS amendments, if any, is not certain due to the decentralised structure of DLT, which may hinder companies' ability to pre-emptively prepare for the changes

Key points 

1. Regulatory Technical Standards

• • ESMA will use DLT stakeholder submissions to review whether the current RTS on pre- and post-trade transparency and data requirements of the Markets in Financial Instruments Regulation can effectively regulate DLT as well as traditional financial trading. If not, the RTS will need to be amended.

2. Decentralised Technology

• • As a decentralised technology, DLT has so far escaped legislation for cross-border data flows, intellectual property rights, capital controls and taxation. The growing interdependence between crypto and the traditional financial system could lead to instability in markets. Whilst some experts have voiced concerns that regulating DLT could stifle growth and innovation, it could provide an unparalleled level of insight for consumers and regulators, allowing real-time access to ledgers and risk monitoring.

3. Fast Approaching Deadlines

• • With the date for potential new RTS set for early 2023, not much time is left to devise legislative reform if the ESMA deem it necessary. For this reason, the ESMA have called for evidence from stakeholders despite lacking a finalised agreement between the Council Presidency and the European Parliament.

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