BNY Mellon and Others Oppose Caps on EU DLT Pilot Regime for Tokenized Securities – Ledger Insights

In March 2023, the EU DLT pilot regime will start, enabling trading of regulated tokenized securities using blockchain technology. While the sandbox supports some regulatory exceptions (see footer), it has financial limitations. Market participants are concerned about these monetary caps, the potential six-year duration of the sandbox, and the uncertainty of what will happen at the end.

DLT caps are a problem for big players

There are few bigger capital markets players than BNY Mellon, the world’s leading global custodian with $43 trillion in assets under custody and management. While BNY Mellon’s Benjamin Duve is very supportive of the goals of the DLT pilot program, he has reservations. “The real problem for us and many of the other bigger players in the market is when you look at the caps – who can spend, how much you can put into the system – the caps can be hit in a matter of days. Or the majority of our customers cannot be served,” Duve said at the Crypto Assets conference.

According to EU legislation, each distributed ledger platform has a total of €6 billion ($5.9 billion) of securities issuance, or a market capitalization of €9 billion ($8.8 billion). In addition, each issuance is capped at €500 million for equities (company market capitalization) and funds and €1 billion for bonds.

“So the question is, where do I go with this? Am I trying to use the technology outside of the pilot regime in a compliant way to build truly scalable solutions?” He expressed concern about fragmented liquidity pools.

Duve added that the caps make it difficult to use the pilot regime “to really change how global capital markets or European capital markets work”. He wanted to see financial limits based on the size of the participants.

BNY Mellon’s head of tokenization also had concerns about what will happen at the end of the pilot regime. Although innovation is encouraged during the pilot, it could end up being more restrictive and heavily regulated.

BNP Paribas’ Kurt Zeimers agreed with Duve on the caps and concerns about what happens at the end. However, he added: “If we do not participate in the pilot regime, we will never have an amendment to CSDR Article 3,” which requires entries in the central depository book. He sees participation as a way of showing the need for change.

ESMA, the regulator, is also reviewing progress and may take industry feedback into account. However, it was clear that industry had already provided feedback on the cap issue prior to the passage of the law.

Too little, too late, too long?

Simon Seiter sees the pilot regime as too little, too late and too long, especially for large capital market players. Seiter works for the German private bank Hauck Aufhäuser Lampe and was Head of Digital Assets at Deutsche Börse until the end of last year. He believes that the investment platform pilot regime caps can work well.

“I’d rather have a regime” than a pilot, said Seiter. “What you build in the sandbox works in the sandbox but not in the real world. If you have to build it for the real world, it works differently than the sandbox.”

But not everyone is unhappy with the DLT pilot regime. SWIAT, a technology solution for regulated digital instruments initiated by DekaBank, is happy with that.

Max Heinzle, CEO of startup 21.finance, which is building a trading platform, is enthusiastic. “Where in the world do we see such a form of legal framework that has this disruptive potential to disintermediate at the level of the DLT pilot regime that allows for nuclear voting and billing,” he said.

Exceptions to the DLT pilot regime

By way of background, the key exceptions in the DLT pilot regime are that a single DLT platform can support issuance, trading, settlement and custody of securities. It also enables market infrastructures to serve customers directly without intermediaries.

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