Investigating digital ledger technology concerns during the Capital Markets Union consultation by the European Commission
The European Commission has launched a consultation regarding the capital markets union (CMU) that runs until 10 June, with a focus on the regulation of interoperability providers in distributed ledger technology (DLT) and permissionless blockchains. This regulatory scheme aims to enable external DLT platforms to connect to central bank-owned platforms for settlement of wholesale DLT-based transactions, under a common legal and access framework.
Key elements of the plan include the development of interoperability-based services that link external permissionless or other DLT platforms with official central bank infrastructures to facilitate settlement. The commission also proposes the implementation of a common legal framework to govern access and level playing field conditions for all market stakeholders using such interoperability providers.
The plan encourages experimentation through controlled testing environments by eligible participants to explore different real-world use cases of interoperability services between DLT networks and central bank platforms. The ultimate goal is to settle wholesale DLT-based transactions directly in central bank money, enhancing efficiency and trustworthiness of the underlying settlement layer.
While not explicitly detailed in the search results, the European Commission’s broader regulatory approach to DLT platforms—reflected in parallel initiatives like the DLT Pilot Regime—advocates for more flexible, risk-based regulation, raising thresholds and integrating DLT into mainstream financial regulation rather than isolating it as an exception.
The consultation also raises the question of whether the differences between permissioned and permissionless DLT systems warrant different rules on conflict of laws. An important question in the consultation is which laws apply to a transaction on a DLT system. The commission is also considering regulating interoperability providers and wants to know whether the limits on transaction volumes should be adapted to the size of the participant.
The section on the DLT Pilot Regime probes potential changes, including whether the licenses granted under the regime should be permanent. The questionnaire is extensive, with a five-page section dedicated to the DLT Pilot Regime and tokenization more broadly. Only two institutions have received approval for the DLT Pilot Regime so far: 21X and CSD Prague.
The consultation highlights the legal complexities of tokenization, not just within the EU. The European Commission is considering multiple options for multi DLT interoperability, including a central securities depository (CSD) integrated with numerous blockchains, a technology company providing interoperability for regulated financial institutions, and a regulated entity providing an interoperability solution.
Two current popular solutions in traditional finance for interoperability are Ownera's FinP2P and Chainlink's Cross-Chain Interoperability Protocol (CCIP). The consultation asks about the preferred connecting factor for proprietary, contractual, and system-related aspects related to transactions on a DLT system. The outcomes of this consultation could shape the European digital assets landscape for years to come.
The consultation is part of the Commission's Savings and Investment Union (SIU) strategy. The commission is also considering whether the differences between permissioned and permissionless DLT systems warrant different rules on conflict of laws. The consultation is open until 10 June, providing stakeholders with an opportunity to voice their opinions on the proposed regulations.
- The European Commission's consultation on the capital markets union (CMU) is focused on the regulation of interoperability providers in distributed ledger technology (DLT) and permissionless blockchains.
- The regulatory scheme aims to enable external DLT platforms to connect to central bank-owned platforms for settlement of wholesale DLT-based transactions, under a common legal and access framework.
- The commission proposes the implementation of a common legal framework to govern access and level playing field conditions for all market stakeholders using such interoperability providers.
- The consultation also asks about the preferred connecting factor for proprietary, contractual, and system-related aspects related to transactions on a DLT system.
- The outcomes of this consultation could shape the European digital assets landscape for years to come, as part of the Commission's Savings and Investment Union (SIU) strategy.
