MISP and DLT Use in European Capital Markets Infrastructure

The tokenisation of securities does not necessarily entail the creation of parallel separate market infrastructures. It can involve a technological evolution of existing CSD services, provided it is embedded within a regulatory framework that ensures the continuity of records, the safety of settlement, and clear infrastructure accountability. The MISP reinforces this approach as the proposed amendments to the CSDR stipulate that the CSDR concepts and requirements should not hinder the use of DLT, and that CSDs should be able to provide services using distributed ledger technology. Equally important is the modernisation of the settlement finality framework as it is crucial for the market not only that securities records can be maintained on a DLT but also that transfers of securities and cash are legally effective, final, and resilient to disruptions. According to the proposed amendments, a CSD’s use of its proprietary DLT solution to provide core services should not be considered as outsourcing. The CSDonDLT project implemented by KDPW fits into this logic, not as an alternative to the regulated market infrastructure, but rather as an additional, complementary technological layer supporting the registration, record-keeping, transfer, and settlement of securities.

Furthermore, the DLT Pilot Regime is also changing. The latest consultation documents and proposed amendments suggest that it will no longer be treated solely as a limited small-scale experiment. Discussions are underway regarding the removal of the current time limit on licences; this, in practice, could transform the DLT Pilot Regime into a more permanent legal framework for specific DLT models. The scope of the regime is to be extended to all financial instruments covered by MiFID II, and the current limit of EUR 6 billion is to be raised significantly. Various threshold options are being considered during the work, including a base threshold of EUR 100 billion, higher limits for those DLT SS or DLT TSS which meet more stringent infrastructure conditions, and separate thresholds for the simplified regime and unbundled services.

Consequently, the relationship between the CSDR and the DLT Pilot Regime remains a key issue. The MISP is a step in the right direction, but it does not remove all uncertainties. On the one hand, it reinforces the CSDR’s technology-neutral approach. On the other hand, it expands the DLT PR to include new categories of services and mechanisms, such as DLT notaries, DLT account keepers, and settlement schemes. Unless the boundary between these regimes is clearly defined, the risk is that DLT will cease to be a technology-neutral solution and will instead act as a regulatory trigger for entry into the DLT PR. This risk is particularly evident in the concepts of the DLT notary and the DLT account keeper. The direction itself is understandable: the legislator is attempting to describe how notarial functions and central account-keeping (record-keeping) services might operate within a DLT architecture. However, the latest documents show that the unbundling of these services is no longer merely an abstract concept but a realistic direction for legislative work. The Member States have widely accepted the need for separate regulation of the DLT notary and DLT account-keeping service, and the draft provides, among others, for thresholds for such services, the possibility of their passporting, and ESMA guidelines on the division of roles and responsibilities.

In the model applicable to the CSDR, core CSD services are highly integrated. Unbundling them may increase flexibility, but may also complicate accountability, data reconciliation, risk management, and relationships with participants. The draft seeks to address this issue by requiring a legally binding agreement between a DLT notary, a DLT account keeper, a DLT SS, a DLT TSS or a CSD operating under the CSDR. Such a solution formally clarifies the division of roles, but does not resolve the underlying problem. The separation of core CSD functions among different entities may significantly increase the operational, contractual, and supervisory complexity of the model. The risk involves not only the fragmentation of responsibilities but also to the day-to-day management of relationships, contracts, changes, incidents, and data reconciliation processes. Crucially, such an approach runs counter to the fundamental objective of the MISP, which is to reduce fragmentation in the European capital market. If unbundling were to lead to a proliferation of roles, entities, contracts, and points of responsibility, it could, in practice, create a new layer of fragmentation rather than reducing it. Therefore, in KDPW’s view, the unbundling of CSD services is not the right course of action and should be assessed with great caution, particularly where it could undermine the coherence, transparency, and resilience of market infrastructure.

Another issue addressed by the MISP is the cash settlement of securities transactions. Tokenisation is of limited value if the payment remains outside the digital infrastructure and requires separate, uncoordinated processing. Therefore, it is important that the MISP is open to new forms of settlement currency, including CBDCs, tokenised commercial bank money, and – particularly significant in the current proposal – e-money tokens. EMTs may be a form of programmable money but they do not automatically replace central bank money as the safest settlement asset for the market infrastructure. Nevertheless, this is a positive sign, as without digital money, the tokenisation of capital markets will be incomplete.

From KDPW’s perspective, however, the target model remains the key issue. DLT can be used either as a technology that creates new silos or as a common market layer. The former option is simpler from a design perspective, but significantly weaker from a systemic point of view. Each entity can build its own register, its own access rules, and its own settlement model, but this would result in a new form of market fragmentation. The latter option, which is closer to the logic of CSDonDLT, involves building a common, controlled infrastructure layer that can be shared by many participants and integrated with existing market processes.

To summarise the above considerations, the MISP strengthens the potential for using DLT in the European market infrastructure, while at the same time expanding the scope of the DLT PR towards a more robust and comprehensive regulatory framework. This is good news for innovation, but also a reason to distinguish even more clearly between the use of DLT as a technology under the CSDR and the application of the specific rules of the DLT PR. If this distinction is maintained, Europe can move from cautious pilot schemes to the practical tokenisation of securities. Otherwise, the market may be stuck between two worlds: a CSDR that is too cautious and a DLT PR that is too broadly defined. Therefore, the true significance of the MISP lies not merely in raising thresholds or adding new definitions. The aim is to provide the European capital market with a path to modernise its infrastructure without losing what is most important: trust, settlement finality, investor protection, and clear accountability.