Technology and regulation of the Distributed Ledger Technology
Crypto-assets are one of the main applications of blockchain technology and distributed ledger technology (DLT) in the financial field.
DLT is a technological infrastructure and protocols that enable simultaneous access, validation, and updating of records in a networked database. DLT is the technology from which blockchains are built. This infrastructure allows users to view all changes, identify the responsible parties, reduces the need for data auditing, ensures data reliability, and restricts access to authorized personnel.
Distributed ledgers are maintained by a network of nodes each of which possesses a copy of the ledger for validating information and achieving consensus on its accuracy.
Nodes serve as the backbone of the blockchain network, primarily verifying transactions and upholding ledger accuracy. When a transaction occurs on the blockchain, it is broadcast to all network nodes.
A pilot regime on DLT for market infrastructures
Therefore, in parallel with the MiCA (Regulation on Markets in Crypto Assets) proposal for a regulation, on 24 September 2020 the European Commission proposed a pilot regime on DLT for market infrastructures that would like to try to trade and settle financial instruments in the form of crypto-assets. This pilot regime is a so-called sandbox approach, a controlled environment that allows temporary derogations from the existing rules so that financial regulators may gain experience with the use of DLT in market infrastructures while ensuring that they can address risks to investor protection, market integrity and financial stability.
The aim of the DLT pilot regime is to allow companies to check and learn more about how the existing rules are applied in practice.
The DLT users under the pilot scheme will be following users licensed by the European Union (EU):
- investment firms and market operators, who will be able to apply for authorisation to organise and maintain a DLT multilateral trading facility;
- central securities depositaries who will be able to apply for authorisation to maintain the DLT settlement system.
The pilot regime also provides a new, non-traditional type of market infrastructure, the DLT trading and settlement systems, which will combine both the DLT multilateral trading facility, and the services provided by the DLT settlement system. The DLT trading and settlement systems must be either a DLT multilateral trading facility organised by an investment firm or a market operator authorised to organise and maintain the DLT trading and settlement systems or a DLT settlement system maintained by the central securities depository authorised to maintain the DLT trading and settlement systems.