Ahead of the announcement of a new MiCA and PRR-centered event series, INATBA is releasing its policy position on the two proposed regulations from the European Commission. These positions contain insights from INATBA’s 170+ members.
The International Association for Trusted Blockchain Application (INATBA) welcomes the European Commission’s proposal for DLT Pilot Regime; we have been actively engaging our 170-member base to assess the impact of the proposed requirements and offer feedback. Our members are supportive of the Commission’s objectives to deliver a well-balanced pilot regime that will facilitate the development of innovative financial services whilst supporting market integrity and investor protection. INATBA has submitted detailed amendments for both the Market in Crypto Assets and Pilot Regime to various stakeholders in the Commission, Parliament, Council together with a number of Member State representatives.
This document summarises several important issues in need of further development:
Issue # 1: The Scope is too limited and should be expanded
- The limitation of the scope of the PRR is considered a bias in favour of existing market participants already approved as MTF and CSD, to the disadvantage of new market participants or other key participants of the financial markets not already licensed to run MTFs or CSDs.
- Bring into scope both OTFs (Organized Trading Facilities) and SIs (Systematic Internalisers), in addition to MTFs and allow entities within the Pilot regime to engage in both OTF and SI, which would currently be prohibited under MiFID.
- Allow all investment firms and credit institutions, even providing only ancillary MiFID services, to operate DLT infrastructure through the Pilot Regime. If DLT MTFs are allowed to perform CSD services, the reverse should be facilitated with DLT SSS also providing DLT MTF services.
- Extend the scope of the pilot regime to include investment funds and asset managers. These are currently not mentioned in the draft proposal. Funds should be able to invest in DLT transferable securities, and thus the Pilot Regime should include custodian service providers.
Issue #2: Thresholds and eligible securities not representative
- The proposed thresholds are too low and the range of eligible securities are too narrow thereby preventing the robust testing of market and commercially representative, large-scale testing or simply put that the PR will not reflect a ‘real world’ environment.
- The range of eligible securities should be extended to include securities, like equities and bonds, units and shares of funds (ETFs).
- At the very least, the limits for shares should increase from EUR 200 million to EUR 500 million with a consideration to increase bonds and total market value of DLT shares and bonds accordingly to be more reflective of real world market operating models.
Issue #3: Uneven playing field – exemptions and permissions
- The proposed structure favours incumbents by effectively establishing double regulatory authorization coupled with a permission granting process which is opaque and without appeal. This represents significant burdens for new market participants and will discourage innovators from participating, specifically if these entities are without a previous MTF and CSD operational approval. A comparable example in telecoms would be requiring a new market entrant to lay copper cables and land lines before gaining access to the process to apply for a 5G licence that was overseen by incumbents.
- Follow the Swiss Confederation example which established a simplified authorization and exemption framework for small DLT MTF or DLT SSS. Thus ensuring that newcomer not regulated to date can participate provided that they comply with the requirements set up by EU institutions about the security and resilience of the underlying technology.
- NCAs should consider a series of objective and qualitative criteria related to each of the projects which apply for such DLT authorizations. The potential refusal or withdrawal of PRR exemptions from ESMA should be conditioned by these objectives to promote the consistency and proportionality of exemptions granted by NCAs under the pilot. ESMA’s role has to be strengthened as regards the non-binding opinion. We need to ensure supervisory convergence and convergent application of the pilot regime across the Single Market.
- Introduce a clear and fair operator complaint processes. Any and all applicants should be able to submit a complaint case directly to ESMA in the event where an operator considers unfair treatment by the NCA when reviewing their exemption request.
Issue #4: Principle of tech neutrality
- The requirement on market participants to use a specific technology is not technology neutral. The imposition of a given technology contradicts also, without apparent and clear justification, regulatory reforms adopted at national level within EU and its neighboring countries (France, Luxembourg, or Switzerland). In these countries the legislator has not imposed any specific characteristic related to the technology chosen by market participants and has not imposed to the private sector any specific technology. To the contrary, the requirements have been focused on the features a technology should provide, whatever its nature (public, private, consortium…), and which shall be justified by the users of the technology.
- Remove any requirement to adopt a specific technology and leave the choice of technology to market participants.
Issue #5: Pilot Regime Duration and Way Forward
- The proposal duration of 5yrs and review process is long and inflexible which is ill-suited to the innovative nature of the technology and macro & geopolitical competitive environment.
- Shorten the testing period to 2 or 3 years which may be enough to test the lifecycle of a DLT-based instrument. This will allow for a faster implementation of a more permanent regime, with or without amendments.
- Introduce a rapid, agile and iterative reporting process to allow for periodic adjustments of the pilot regime requirements. This will allow the regime to keep pace with market developments.
To read more about INATBA’s work on MiCA and the PRR, check out the task force webpage.