The EU’s DLT Pilot Regime needs fixing, or the region will become a “regulatory fly-over zone” for digital assets, writes Lewis McLellan. The head of content of the Digital Monetary Institute at independent banking and economic think tank OMFIF recently puiblished an opinion piece proposing changes to the DLT Pilot Regime in order to make the EU more competitive in the DLT landscape.
“The failure of the pilot regime should be blamed on its design,” McLellan states. Referencing recent papers and consultations from the European Securities and Markets Authority (ESMA), as well as the French and Italian regulators, he identifies three major weaknesses about the initiative that are hindering uptake: the size cap, approach to cash settlement, and miscommunication about its duration.
Size matters
With a volume cap of €6 billion, it is “impossible for participants to do enough volume to generate a return on their investment”, claims McLellan. This could thus be a factor causing the lukewarm response to the pilot regime. Given that such initiatives are for experimental technology, the cap is necessary to manage risks. However, McLellan believes that to stir interest, the European Commission should provide a pathway to full uncapped adoption.
Cash it in
Finding a new solution to cash settlement is “a matter of urgency”, McLellan writes. Currently, only e-money tokens issued by credit institutions can be used – a rule that ESMA has identified as an obstable to adoption. “The new version of the pilot regime must permit settlement in Markets in Crypto-Assets Regulation (MiCA)-licensed, euro-denominated stablecoins,” he adds. “As well as improving the efficiency of pilot regime projects by providing easy access to cash on-chain, this would provide a shot in the arm for European stablecoins – much needed in the face of US promotion of the instrument.”
Time is money
One common misconception McLellan addresses in his article is the belief that the pilot regime would end three years after its launch. “This disincentivised participation since potential applicants were reluctant to put resources into developing infrastructure for a regime with no lifespan beyond 2026.” There is currently no time limit put on the pilot regime – the Commission’s commitment to enourage DLT-based innovation is a long-term one
