Regulation (EU) 2022/858 of the European Parliament and of the Council, also known as the Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT Pilot Regime Regulation), has been in force since March 23, 2023. This Regulation establishes a legal framework enabling the operation and testing of market infrastructures based on distributed ledger technology (DLT) within the European Union. The aim of this pilot regime is to support innovative solutions in the trading and settlement of financial instruments that are digitized using DLT technologies, while maintaining an appropriate level of investor protection and financial stability.
DLT market infrastructures may take the form of a DLT multilateral trading facility (DLT MTF), a DLT settlement system (DLT SS), or a DLT trade repository (DLT TSS). Each of these entities is eligible to apply for a specific authorization based on exemptions from selected requirements set forth in existing financial market regulations, such as MiFID II, the CSDR, or the Market Abuse Regulation (MAR). In this context, market infrastructures under the pilot regime may take three basic forms:
- DLT MTF (multilateral trading facility) – a platform enabling trading in DLT-based financial instruments,
- DLT SS (settlement system) – a system for settling transactions,
- DLT TSS (trade settlement system) – systems for trading and settlement
The launch of the pilot scheme is an important step toward enabling technologies such as blockchain to become part of the regulated financial market in the EU.
The pilot regime is open not only to existing financial market participants, such as investment firms or operators of regulated markets, but also to new entities that have not yet been authorized under European legislation. This means that even new companies or startups can apply for authorization to operate under the MiFID II Directive or the CSDR Regulation, while also applying for special authorization under the DLT Pilot Regulation, which will allow them to test and operate services based on DLT technology.
In such a case, the relevant regulatory authority will not assess compliance with those requirements for which the applicant has requested an exemption under Article 4 of the DLT Pilot Regulation. In other words, the company will not have to comply with all the regulatory rules normally required of traditional market participants—it will receive a temporary, special authorization that allows it to test new solutions in a controlled environment. Entities that obtain such authorization may operate DLT market infrastructures for the duration of the pilot regime. Upon its conclusion, they may either apply for full authorization under applicable EU regulations, or their special authorization will expire.
The application for authorization is submitted to the competent supervisory authority of the Member State that granted the applicant authorization to operate under the relevant EU legislation.
The application must include, in particular, a description of the technical solution for the DLT infrastructure, a risk management system, measures to ensure investor protection and market integrity, as well as a proposal for supervisory and reporting mechanisms.
Under the pilot regime, only financial instruments that meet pre-determined quantitative and qualitative limits may be admitted to trading or registered in a DLT market infrastructure. These restrictions are intended to ensure that the pilot regime is implemented on an appropriate scale and that risks to the market and investors are minimized.
DLT financial instruments may be admitted to trading or recorded in the DLT market infrastructure only if, at the time of their admission to trading or registration in the distributed database, they meet one of the following conditions:
- they are shares whose issuer has a market capitalization or preliminary market capitalization of less than 500 million EUR;
- they are bonds or other forms of securitized debt, including depositary receipts relating to such securities or money market instruments, where the size of the issue does not exceed EUR 1 billion, with the exception of instruments that contain a derivative or have a structure that could make it difficult for a client to understand the risks;
- these are units of collective investment undertakings, to which Article 25(4)(a)(iv) of Directive 2014/65/EU applies, i.e., shares or units in undertakings for collective investment in transferable securities (UCITS) under Directive 2009/65/EC, which are not structured UCITS pursuant to the second subparagraph of Article 36(1) of Regulation (EU) No 583/2010, and whose market value of assets under management does not exceed EUR 500 million.
These limits reflect the European legislator’s intention to allow, within the pilot scheme, the testing primarily of smaller issuance volumes and less complex financial instruments. The aim is to verify the practical applicability of DLT technology in a regulated environment, while maintaining a high level of investor protection, market integrity, and financial stability.
The introduction of the pilot regime represents a significant step toward the gradual integration of DLT technologies into the traditional financial environment. It allows for the verification of the practical applicability of these innovations within a regulated market, thereby contributing to the development of modern and secure digital financial services in the European Union.
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