As a market infrastructure with a wealth of experience in the use of blockchain, KDPW regularly reviews the relevance and potential of using distributed ledger technology in the capital markets, monitors legislative initiatives and takes an active part in shaping future regulations, both European and national.
In early 2022, KDPW launched a research project to conduct a feasibility study of the participation of KDPW and national market participants in the DLT pilot regime for market infrastructures under Regulation (EU) 858/2022. The DLT pilot regime is part of the Digital Finance Package adopted in September 2020 as a digital finance solution package including digital finance, retail payments and legislative proposals on crypto-assets and digital resilience. The DLT pilot regime aims to create a market for tokenised financial instruments, promote the uptake of DLT technology in trading and post-trading, and allow market participants and European supervisory authorities to gain experience, including assessing opportunities and risks, in DLT technology.The key objective underlying the DLT pilot regime is to allow investment firms, trading platforms and central securities depositories to operate DLT market infrastructures for tokenised financial instruments. In addition, third parties which are not authorised under MiFID II or CSDR may be authorised to operate such infrastructures provided that they meet the requirements set out in the Regulation. The Regulation provides for a number of possible but conditional exemptions from the MiFID II and CSDR regimes for DLT market infrastructures. According to the timetable, the DLT pilot regime will become effective in March 2023 and will continue for three years with the possibility of an extension to six years. If ESMA and the European Commission consider that the DLT pilot regime is successful, the provisions on DLT infrastructures may be transposed into other EU capital markets regulation.
As a result of the feasibility study, including completed analyses and co-operation with external partners, the decision was made at the end of 2022 not to join the initiative, among others due to its ultimately very conservative nature and limited time horizon. The recommendation will be subject to periodic review and may change over the course of the DLT pilot regime.
Proof of Concept of a DLT market infrastructure
Notwithstanding the current negative recommendation in relation to participation in the DLT pilot regime and its rationale, in KDPW’s view, new technologies, including DLT, present a number of advantages and opportunities and pose a number of challenges and risks for participants in the traditional market infrastructure. Consequently, KDPW has decided to continue its research and development work on the application of distributed ledger technology. Further work will take a predominantly technological perspective with regard to the development of components in selected process areas with the aim of launching a minimum viable product (MVP) within the proof of concept (PoC) of a DLT market infrastructure.