EU launches Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology

In short:

• The new Regulation became applicable on the 23 March 2023.
• This Regulation is the first piece of EU legislation explicitly including DLT applications. The EU considered this necessary due to existing regulatory gaps and to allow operators and authorities to learn more about new technologies. 
• This pilot regime may precede more pilot regimes in sectors where DLT applications will play a major role in upcoming years.
• The outcomes of the European Blockchain Regulatory Sandbox may lead to such pilot regimes or changes of legislation in this sector.

Important news for blockchain enthusiasts with interest in regulation! On the 23 March 2023, Regulation 2022/858 on a pilot regime for market infrastructure based on distributed ledger technology (DLT) entered into force. Not only is this the first piece of Union legislation which has become applicable and explicitly includes regulation on the use of DLT, but it also creates a Union-wide framework for operators and competent authorities to experiment with market infrastructures based on DLT. This EU initiative is very relevant for the interaction between DLT applications and EU regulation and for the European Blockchain Regulatory Sandbox!

So, why would the EU create a six-year pilot regime? And what will this Regulation mean for operators of DLT market infrastructures? 

The EU acknowledges in the Regulation that current legislation is not designed with new technologies such as DLT market infrastructures in mind. Additionally, most crypto-assets are currently unregulated on EU level and regulatory gaps exist due to the legal, technological and operational specificities related to the use of DLT and crypto-assets as financial instruments. To deal with these issues, the EU finds a pilot regime suited to allow for the development of DLT and of crypto-assets qualifying as financial instruments. This allows certain DLT market infrastructures to be exempted from applicable legislation that would otherwise hinder DLT applications. And the EU will ensure through this regime that it will play a leading role regarding financial instruments in tokenised form and the development of a secondary market for such assets. Moreover, such a pilot allows competent authorities as ESMA to draw lessons from these inventive market infrastructures.

In short, the regulation will lay down requirements to DLT market infrastructures and their operators with respect to specific permissions to operate DLT market infrastructures, exemptions thereto, operation and supervision of the market infrastructures and the cooperation between operators and competent authorities. Also interesting are the definitions the Union attributes to terms as ‘tokenisation’, ‘DLT’, distributed ledger’, ‘consensus mechanism’ and ‘DLT network node’. Further, the Regulation prescribes specific permissions to operate different DLT market infrastructures and requirements and exceptions from existing regulation for three different DLT market infrastructures. This includes, for example, the publication of rules on accessing the distributed ledger, the segregation of funds and a description of the DLT used when applying for a specific permission. The Regulation also obliges operators to cooperate with regulators, requires ESMA to publish guidelines and reports, and prescribes that the European Commission proposes amendments to existing legislation based on the pilot regime’s results. More information about the content of this Regulation can be found on our website.

As a DLT application operator outside the financial markets sector, you may wonder what this regulation could mean for you. 

Well, pilot regimes such as created under this Regulation may provide lessons learned for other sectors where DLT applications could play a major role, without existing legislation being fit for such inventions. This may well be one of the areas that will be discovered as part of the European Blockchain Sandbox.

To summarise: the new regulation creating a pilot regime for DLT market infrastructures presents a great opportunity to gain experience how legislation should adapt to new technologies.