EC proposal for an EU pilot regime for DLT-based market infrastructureOther noteworthy developmentsConclusion
Thursday, 12 November, 2020
The Digital Regulator
EU pilot regime for DLT-based market infrastructure
The European Commission’s (EC) Digital Finance PackageDigital Finance Packagelink1 (DFP), issued on 24 September 2020, includes a proposal for a pilot regime for market infrastructures based on the distributed ledger technology (DLT). The EC acknowledges that no sustainable and expanding primary crypto-asset market is possible without a secondary market that provides liquidity. The proposal for a pilot regime is, therefore, a logical complement to the recommended EU regulatory framework on crypto-assets reviewed in the October issue of the Digital Regulator. Despite recognising the mutual dependency of the two proposals, the EC takes a very cautious approach by proposing rules for a pilot regime with sandbox characteristics, as opposed to offering a regulation for a fully-fledged regime. The European Council and the European Parliament will decide the fate of the pilot regime, five years after it comes into force. Meanwhile, Switzerland has adopted a full-fledged and final crypto-asset regulation, also covering DLT-based market infrastructure, which comes into force next year after the ongoing consultation on implementing ordinances is over.
The month of October 2020 recorded some other noteworthy regulatory developments in the digital space. The Bank for International Settlements (BIS) issued principles for Central Bank Digital Currencies (CBDCs). The Financial Stability Board (FSB) published final recommendations about Global Stable Coins (GSCs). On the compliance side, the US Financial Crimes Enforcement Network (FinCEN) seeks to lower the applicability threshold for the ‘Travel Rule’, while the UK Financial Conduct Authority (FCA) banned the sale of crypto derivatives to retail consumers due to suitability concerns.
EC proposal for an EU pilot regime for DLT-based market infrastructure
As part of the DFP, the EC issued a proposalproposallink1 for a pilot regime for market infrastructures based on DLT. The proposal aims to allow the development of a secondary market for crypto-assets and is a necessary and ideal complement to the proposal for a regulatory framework on crypto-assets, which was reviewed in the previous issue of the Digital Regulator. The proposed regime for the DLT-based market infrastructure shares the characteristics of a sandbox, as it imposes clear limits on operators and grants regulatory exemptions within these limits; moreover, it has a maximum duration of six years.
The proposal for a pilot regime for market infrastructures based on DLT is a necessary complement to the proposal for a regulatory framework on crypto-assets; both suggestions have been presented by the EC as part of the DPF. The proposals differ in that the latter indicates an element of finality in the regulation, while the former proposes a pilot regime that contains elements of a sandbox and is at best an intermediate step towards a final proposed regulation. This dichotomy evidences great circumspection by the EC in regulating crypto-asset markets and promoting regulatory certainty. The European Council and Parliament will decide the future of the pilot regime five years after it has come into force, even as the Swiss crypto-asset regulation, also covering DLT-based market infrastructure, launches next year.
Other noteworthy developments
Switzerland has commenced consultationconsultationlink1 on the blanket ordinance in the area of blockchain. The amendments to the relevant Acts and Ordinances will enter into force during the first half of 2021.
The BIS and the FSB issued principles and recommendations for CBDCs and GSCs, further reinforcing regulatory certainty in these spaces.
The Bank of Japan (BoJ) will begin working on its own CBDC next year, while the Bahamas has become the first country to introduce a retail CBDC.
The US FinCEN wants to lower the applicability threshold for the ‘Travel Rule’ from USD 3,000 to USD 250, while the UK FCA banned the sale of crypto derivatives to retail consumers on suitability concerns.
The EC’s proposal for a pilot regime for DLT-based market infrastructure naturally complements the recommended regulatory framework on crypto-assets reviewed in the October issue of the Digital Regulator. The latter regulates the primary market; the former supports the secondary market. This mutually reinforcing complementarity appears at odds with the ‘pilot’ nature of the secondary market regime compared to the ‘final’ nature of the proposed primary market framework. The EU has chosen a very circumspect approach, while Switzerland will witness the adoption of a fully-fledged regulatory framework for crypto-asset markets and broader DLT applications in early 2021.
October 2020 was characterised by several noteworthy regulatory developments in the digital space, including the start of the consultation in Switzerland on implementing ordinances in the area of blockchain, the issuance of principles for CBDCs by the BIS, and the publication of recommendations about GSCs by the FSB.
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