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17 April 2023

Pilot Regime for use of Distributed Ledger Technology in Capital Market Infrastructures

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As the globalization and digitalization of the financial sector continuously gain momentum on multiple fronts, new legal challenges arise with regulators seeking to balance encouragement of innovation with the desire to ensure adequate protection of persons and society. Distributed ledger technology (“DLT”) is a means of saving information through a distributed ledger, i.e. a repeated digital copy of data available at multiple locations which are built upon public-key cryptography, a cryptographic system that uses pairs of keys; public keys, which are publicly known and essential for identification, and private keys, which are kept secret and are used for authentication and encryption (1). A wellknown version of a DLT is blockchain technology. 

On 24 September 2020, the European Commission (the “EC”) issued a Digital Finance Package with the aim to boost Europe’s competitiveness and innovation in the financial sector, paving the way for Europe to become a global standard-setter (2). Moreover, on 30 June 2022, the European Union issued Regulation (EU) 2022/858 of 30 May 2022 regarding a pilot regime for market infrastructures based on distributed ledger technology (the “DLTR”) with its main purpose being to promote innovation and allow for temporary derogations from current applicable law to gain experience in the use of DLT in market infrastructures (“DLT MI”) while mitigating risks for investors, market integrity, and financial stability. The DLTR entered into force on 23 March 2023. The DLTR essentially serves as a temporary “sandbox” for the eventual regulation of DLT financial instruments and provides regulatory authorities and the financial market with the opportunity to experience and identify opportunities and risks associated with DLT and to incorporate the results into a permanent legal framework (3).

Lastly, in March 2023, ESMA issued both guidelines (4) (“ESMA Guidelines”) and a Q&A (5) on the DLTR (“ESMA Q&A”).

The DLTR will be applicable for a maximum of six years (6). ESMA shall by 24 March 2026 present a report to the EC on, inter alia, the functioning of the DLT MI’s, the number and value of transactions traded or settled on DLT MI’s and an overall assessment of the costs and benefits of the pilot regime provided for in this Regulation and a recommendation of whether, and under which conditions, to continue the DLTR to assist the EC and the European Council in determining the future regulation of DLT financial instruments (7).

Joachim Buznicki Nørlem

Senior Associate

+45 30 37 96 02

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Kadir Kurt

Associate

+45 30 37 96 27

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