The Association for Financial Markets in Europe (AFME) has issued a new report advocating for regulatory reforms in tokenisation and distributed ledger technology (DLT) across the EU. Responding to a call from the EU’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), AFME recommends policy adjustments that address existing regulatory barriers—particularly the Central Securities Depositories Regulation (CSDR)—which are hindering the growth of tokenised assets in the European financial market.
One of AFME’s primary concerns is the conflict between the traditional CSDR requirements and the flexibility that DLT and tokenisation offer. Currently, CSDs handle essential tasks like securities issuance, record-keeping, and transaction settlement. DLT, however, could manage record-keeping independently, while smart contracts could execute automatic processes such as interest payments, dividend distribution, and even delivery versus payment (DVP) settlement without a centralised counterparty (CCP).
EU regulatory obstacles
AFME’s report points to regulatory developments in Germany, Luxembourg, and Italy, where DLT-friendly laws allow issuances to bypass traditional CSDs. For example, Germany’s electronic securities law, eWpG, enables decentralised registries to maintain asset records through a registrar—bypassing some CSDR requirements. However, CSDR still mandates that publicly traded securities must be registered with a CSD, which limits the trading scope of eWpG-issued assets to over-the-counter (OTC) markets.
The report warns that if the EU fails to modernise CSDR regulations, it risks losing its current edge in tokenisation to jurisdictions with more progressive frameworks. Germany’s Börse Stuttgart, for instance, opted to establish its BX Digital exchange in Switzerland rather than domestically, highlighting the regulatory obstacles within the EU.
Revising the DLT pilot regime
AFME also offers near-term recommendations for the DLT Pilot Regime, implemented in March 2023 to ease some regulatory constraints for DLT-based platforms. The current regime allows for entities to function as both trading and settlement systems. However, AFME argues that requiring DLT-based settlement providers to also register as CSDs is overly restrictive, with only the Prague CSD authorised so far.
To make the regime more appealing, AFME suggests increasing activity caps and permitting securities issued under the regime to be eligible as central bank collateral. The association also notes the UK’s Digital Securities Sandbox, which does not require registration as a CSD, as a potential model for attracting DLT providers.
AFME’s report outlines a vision for a tokenised European capital market that could enhance local funding for startups and promote a more unified capital market. The recommendations build on earlier policy proposals, aiming to ensure Europe’s competitiveness and drive DLT innovation within the EU.
