New blockchain framework for capital markets
Blockchain, or distributed decentralised database technology, is currently finding increased use in many areas of law and business. Capital markets are no exception, and one of the most interesting developments is the introduction of a pilot regime of distributed ledger technology (DLT) in market infrastructure.
An amendment to the Capital Market Undertakings Act and the Insurance Act implements into Czech law Regulation (EU) No. 2022/858 on a pilot regime for market infrastructures based on DLT, effective from 23 March 2023. The amendment is currently in the chamber of deputies and is to come into effect the day after its publication in the Collection of Laws.
By introducing a temporary pilot regime for financial services based on distributed ledger technology (DLT), the regulation removes regulatory barriers to the issuance, trading, and settlement of crypto assets constituting financial instruments as defined in the Capital Market Undertakings Act.
The regulation introduces three specific licensing regimes for DLT market infrastructures:
- DLT multilateral trading facility (MTF)
- DLT settlement system
- DLT trading settlement system.
Central securities depositories and securities brokers will be able to obtain a licence to operate individual DLT market infrastructures.
In the pilot regime, the regulation limits the range of financial instruments that can be admitted to trading or recorded on DLT market infrastructures. Thus, under the pilot regime, the regulation applies to shares with a market capitalisation lower than EUR 500 million, bonds or other forms of securitised debt or financial market instruments with a value of less than EUR 1 billion, and to units of collective investment undertakings where the market value of the assets under management must be less than EUR 500 million. The total value of all market instruments held on DLT market infrastructures may not exceed EUR 6 billion.
The amendment changes the definition of a financial instrument in the Capital Market Undertakings Act. Under the new provisions, all currently legally regulated investment instruments issued using DLT will also be considered investment instruments.
The implementation of DLT in practice will place significant demands on operators of DLT market infrastructures, from the development of a detailed business plan and detailed investor information, through the adoption of cyber security measures, the calculation of the monthly average value of asset holdings, to the operational risk management in place and timely transition strategies once the value of DLT financial instruments reaches EUR 9 billion.
On the other hand, as the regulation introduces a pilot regime for DLT market infrastructures, it allows the Czech National Bank to exempt operators from the requirements of the current capital markets regulation (MiFID II, MiFIR, Regulation (EU) No 909/2014, on improving securities settlement in the European Union and central securities depositories).