European pilot scheme: a unique experimental framework
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Europe can now authorise the creation of exchanges for tokenised financial securities. But there is still a long way to go to get started.
After years of waiting, it is finally here: the European pilot scheme, which allows financial players to develop marketplaces offering tokenised financial securities (security tokens), came into force six months ago, in March 2023. This is a first on a global scale.
This is unprecedented proof of the willingness of European institutions to support the digital transformation of financial activities thanks to distributed ledger technologies such as blockchain
Matthieu Lucchesi, General Counsel for Gide
"Its history goes back to the drafting of the Pacte law (2019), which had set the framework for the regulation of digital assets in France," recalls Mark Kepeneghian, co-founder of Kriptown, a market infrastructure project reserved for SMEs. "At the time, the Autorité des marchés financiers (AMF) noticed that there were a lot of obstacles for fundraising that involved issuing financial securities on blockchain", he points out.
This experimental framework will be in force for three years, tacitly renewable for a further three years. Several thresholds have been put in place to ensure that no project has a systemic impact during this phase.
"Even though this is an experimental framework, one of the challenges now is to give players visibility over its long-term nature, in order to encourage them to register their projects within this innovative framework," insists Matthieu Lucchesi, General Counsel for Gide.Given the complexity of the subject, this pilot scheme is obviously not for everyone: it requires fairly cumbersome licences (DLT MTS, DLT SS or DLT TSS) that few start-ups will be able to obtain. These licences are designed more for the big market players.
It's unlikely that many start-ups will be approved because the prudential requirements (equity, liquidity, etc.) are quite high. It's much harder to get than PSAN approval
Mark Kepeneghian, co-founder of Kriptown.
"Commercial considerations, particularly implementation costs and investor demand, will now be decisive in determining whether DLT becomes a permanent feature in the world of bonds, equities and mutual funds," insists Alexander Tollast, Counsel, Finance & Capital Markets for Clifford Chance and an expert in the tokenisation of digital assets.German, Spanish and Liechtenstein operators have already submitted applications. This is not yet the case in France, but it should come. To date, SG-Forge and Kriptown seem to be the most advanced on this file.
Outside the EU, in the UK, the operator of the London Stock Exchange plans to launch its platform within 12 months. Switzerland's SIX, which operates the Zurich stock exchange and took control of the Madrid exchange three years ago, meanwhile, has launched a blockchain-based trading platform, the SIX Digital Exchange (SDX), regulated by the Swiss stock exchange regulator, at the end of 2021.
In the long term, the European pilot scheme is seen as an opportunity to redefine the market infrastructure on which new building blocks and standards have been added over the past 40 years.
"We have a unique opportunity to overhaul everything to gain in efficiency" Mark Kepeneghian wants to believe.
Security token marketplaces will be able to benefit from a number of exemptions from traditional exchanges_
The ability to operate as both a trading operator and clearing house.
The idea of merging the two activities is unprecedented, as the traditional system requires two separate entities (Euronext and Euroclear, for example).
Automated reporting to the regulator.
The regulator simply has to "plug in" to the blockchain, whereas it is mandatory for each exchange to mobilise teams to carry out daily reporting.
Possibility of addressing investors directly.
At present, it is absolutely necessary to go through an approved broker to access Euronext. Some intermediaries could thus disappear.
Purchases of tokens will be able to be made in cryptocurrencies and not just in euros.
Technical benefits of blockchain market infrastructures
- Reduction of IPO costs to a few thousand euros(between €200,000 and €400.000€ on average on Euronext)
- Reduction of settlement time delivery of assets (from 2 days to instantaneously)
- Reduction of fees with the elimination of intermediaries
A barrier to entry for smaller players_
- €5 to 10 million of funds blocked
- Annual compliance fees of €500.000 €