EFAMA advocates for change in EU regulations governing fund tokenization to stay current
In the rapidly evolving world of Distributed Ledger Technology (DLT), the European Fund and Asset Management Association (EFAMA) has released a comprehensive report, "Tokenisation, a buyside practitioner's guide," aligning with the European Securities and Markets Authority’s (ESMA) recommendations for the EU's regulatory reform of the DLT Pilot Regime for securities.
The report urges for a permanent, flexible, and market-friendly DLT Pilot Regime, aiming to support innovation in securities tokenisation while maintaining strong regulatory oversight to manage risks effectively. Key recommendations include making the DLT Pilot Regime permanent, increasing flexibility, enhancing market attractiveness, and facilitating exemptions under close supervision.
EFAMA is concerned about different national rules potentially reducing the potential efficiencies of digital assets. To address this, they suggest raising the thresholds to encourage participation and greater liquidity in secondary markets. The association also advocates for trading to be allowed on platforms beyond the DLT Pilot Regime and for greater convergence between other regulations such as MiFID, EMIR, CSDR, and the DLT Pilot Regime.
The European Commission is currently reviewing the DLT Pilot regime, considering the applicability of MiCA-regulated assets in the broader financial ecosystem. The Commissioner's advisor, Peter Kerstens, has expressed concerns about Europe becoming a "flyover zone" in the race to establish dominance in DLT, emphasising the need for Europe to remain competitive.
So far, only two institutions have received approval under the DLT Pilot Regime, and the short-term nature of the regime and the low activity limits have dissuaded major institutions from participating. To this end, EFAMA reviews the legal landscape in a handful of EU jurisdictions, urging further regulatory reform.
The EU has enacted two pieces of digital asset-related regulation - MiCAR for crypto-assets including stablecoins and the DLT Pilot Regime for securities. The Commission is also reviewing the long-term regulation of traditional finance (MiFID, CSDR) in relation to DLT-specific legislation, such as the DLT Pilot Regime.
Meanwhile, the derivatives regulator, CFTC, is involved in piloting tokenized collateral in the United States, adding another dimension to the global conversation on DLT in finance. As the European Commission reviews current legislation, it remains to be seen how the EU will navigate this complex landscape to foster innovation while maintaining robust regulation.
[1]: https://www.efama.org/-/media/files/efama/position-papers/tokenisation-a-buyside-practitioners-guide/efama-tokenisation-a-buyside-practitioners-guide.pdf [2]: https://www.esma.europa.eu/sites/default/files/library/2021-1402_esma-opinion-on-the-review-of-the-dlt-pilot-regime_en.pdf [3]: https://www.efama.org/-/media/files/efama/news-and-events/press-releases/2021/efama-calls-for-a-permanent-flexible-and-market-friendly-dlt-pilot-regime_en.pdf [4]: https://www.efama.org/-/media/files/efama/position-papers/tokenisation-a-buyside-practitioners-guide/efama-tokenisation-a-buyside-practitioners-guide.pdf
- To maintain a competitive edge in the dynamic DLT industry, EFAMA's report emphasizes the need for a permanent, flexible, and market-friendly DLT Pilot Regime, aiming to foster innovation in securities tokenization while ensuring effective risk management.
- EFAMA's recommendations for the DLT Pilot Regime encompass making it permanent, increasing flexibilty, enhancing market attractiveness, and facilitating exemptions under close supervision, to mitigate issues arising from varying national rules.
- In the ongoing review of the DLT Pilot Regime, the European Commission is considering the applicability of MiCA-regulated assets in the broader financial ecosystem, aiming to keep Europe competitive in the global race for dominance in DLT.
- Aiming to encourage participation and greater liquidity in secondary markets, the report suggests raising thresholds for digital assets and advocates for trading on platforms beyond the DLT Pilot Regime, fostering convergence with other regulations like MiFID, EMIR, CSDR, and the DLT Pilot Regime.
- The report also reviews the legal landscape in several EU jurisdictions, urging further regulatory reform to attract major institutions to participake in the DLT Pilot Regime, which currently has only two approved institutions due to its short-term nature and low activity limits.
- In the global conversation on DLT in finance, the derivatives regulator, CFTC, is piloting tokenized collateral in the United States, adding another layer of insights to the complex financial landscape that is being navigated by the EU, with the ongoing review of the long-term regulation of traditional finance and DLT-specific legislation such as the DLT Pilot Regime. [Link 1, 2, 3, 4]
