The Association for Financial Markets in Europe (AFME) has released a series of papers addressing the challenges facing digital finance and distributed ledger technology (DLT) in capital markets. Following a general overview of digital finance, AFME has now published policy roadmaps for the EU and the UK, outlining steps to scale DLT usage.
While DLT projects are transitioning from experimentation to implementation, existing regulations are hindering their broader adoption. AFME’s recommendations focus on amending the Central Securities Depositories Regulation (CSDR), with four of its eight proposals targeting this area.
The DLT Pilot Regime, which began in March 2023, has yet to see any solutions launched. AFME notes that large financial institutions are hesitant to participate due to the regime’s restrictive limits and the absence of firm commitments to update relevant laws.
Book-entry
AFME also argues that DLT settlement systems should be allowed to operate within the Pilot Regime without requiring full central securities depository (CSD) authorisation. Additionally, it calls for regulatory clarity on whether DLT securities can qualify as ‘book-entry’ form, which is currently a prerequisite for using securities as collateral under CSDR.
The association further requests that settlement finality rules, which ensure legal enforceability even in insolvency, be extended to DLT-based platforms.
Regulatory guidance
On the digital money front, AFME urges the European Central Bank to make at least one of its ongoing wholesale DLT settlement solutions permanent. It also seeks regulatory guidance on the use of tokenised commercial bank money and approved stablecoins.
Finally, AFME calls for the harmonisation of custody rules across Europe, addressing the fragmentation caused by national legislation. While the EU initially led with the DLT Pilot Regime, other jurisdictions are quickly catching up, according to AFME.
