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(1) It is important to ensure that Union financial services legislation is fit for the digital age and contributes to a future-proof economy that works for citizens, including by enabling the use of innovative technologies. The Union has a policy interest in exploring, developing and promoting the uptake of transformative technologies in the financial sector, including the uptake of distributed ledger technology (DLT). Crypto-assets are one of the main applications of distributed ledger technology in the financial sector.

(2) Most crypto-assets fall outside the scope of Union financial services legislation and create challenges in terms of, among other things, investor protection, market integrity, energy consumption and financial stability. Such crypto-assets therefore require a dedicated regulatory framework at Union level. By contrast, other crypto-assets qualify as financial instruments within the meaning of Directive 2014/65/EU of the European Parliament and of the Council . Insofar as crypto-assets qualify as financial instruments under that Directive, a full set of Union financial services legislation, including Regulations (EU) No 236/2012 , (EU) No 596/2014 , (EU) No 909/2014 and (EU) 2017/1129 and Directives 98/26/EC and 2013/50/EU of the European Parliament and of the Council potentially apply to issuers of such crypto-assets and to firms conducting activities related to such crypto-assets.

(3) The so-called ‘tokenisation’ of financial instruments, that is to say, the digital representation of financial instruments on distributed ledgers or the issuance of traditional asset classes in tokenised form to enable them to be issued, stored and transferred on a distributed ledger, is expected to open up opportunities for efficiency improvements in the trading and post-trading process. However, as fundamental trade-offs involving credit risk and liquidity remain in a tokenised world, the success of token-based systems will depend on how well they interact with traditional account-based systems, at least in the interim.

(4) Union financial services legislation was not designed with distributed ledger technology and crypto-assets in mind, and contains provisions that potentially preclude or limit the use of distributed ledger technology in the issuance, trading and settlement of crypto-assets that qualify as financial instruments. Currently, there is also a lack of authorised financial market infrastructures which use distributed ledger technology to provide trading or settlement services, or a combination of such services, for crypto-assets that qualify as financial instruments. The development of a secondary market for such crypto-assets could bring multiple benefits, such as enhanced efficiency, transparency and competition in relation to trading and settlement activities.

(5) At the same time, regulatory gaps exist due to legal, technological and operational specificities related to the use of distributed ledger technology and to crypto-assets that qualify as financial instruments. For instance, there are no transparency, reliability or safety requirements imposed on the protocols and ‘smart contracts’ that underpin crypto-assets that qualify as financial instruments. The underlying technology could also raise some novel forms of risk that are not adequately addressed by the existing rules. Several projects for the trading of crypto-assets that qualify as financial instruments and related post-trading services and activities have been developed in the Union, but few are already in operation, and those that are in operation are of limited scale. Furthermore, as highlighted by the European Central Bank’s (ECB) Advisory Group on Market Infrastructures for Securities and Collateral and its Advisory Group on Market Infrastructures for Payments, the use of distributed ledger technology would entail similar challenges to those faced by conventional technology, such as fragmentation and interoperability issues, and would potentially also create new issues, for instance in relation to the legal validity of tokens. Given the limited experience as regards the trading of crypto-assets that qualify as financial instruments and related post-trading services and activities, it is currently premature to significantly modify Union financial services legislation to enable the full deployment of such crypto-assets and their underlying technology. At the same time, the creation of financial market infrastructure for crypto-assets that qualify as financial instruments is currently constrained by requirements embedded in Union financial services legislation that are not well suited to crypto-assets that qualify as financial instruments or the use of distributed ledger technology. For instance, platforms for trading crypto-assets usually give direct access to retail investors, whereas traditional trading venues usually give access to retail investors only through financial intermediaries.

(6) In order to allow for the development of crypto-assets that qualify as financial instruments and for the development of distributed ledger technology, while preserving a high level of investor protection, market integrity, financial stability and transparency, and avoiding regulatory arbitrage and loopholes, it would be useful to create a pilot regime for market infrastructures based on distributed ledger technology to test such DLT market infrastructures (the ‘pilot regime’). The pilot regime should allow for certain DLT market infrastructures to be temporarily exempted from some of the specific requirements of Union financial services legislation that could otherwise prevent operators from developing solutions for the trading and settlement of transactions in crypto-assets that qualify as financial instruments, without weakening any existing requirements or safeguards applied to traditional market infrastructures. DLT market infrastructures and their operators should have in place adequate safeguards related to the use of distributed ledger technology to ensure the effective protection of investors, including clearly defined chains of liability to clients for any losses due to operational failures. The pilot regime should also enable the European Supervisory Authority (European Securities and Markets Authority) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council (ESMA) and competent authorities to draw lessons from the pilot regime and to gain experience of the opportunities and specific risks relating to crypto-assets that qualify as financial instruments and to their underlying technologies. The experience gained with the pilot regime should help identify possible practical proposals for a suitable regulatory framework in order to make targeted adjustments to Union law as regards the issuance, safekeeping and asset servicing, trading and settlement of DLT financial instruments.

(7) To meet the objectives of the pilot regime, a new Union status as DLT market infrastructure should be created in order to ensure that the Union is able to play a leading role regarding financial instruments in tokenised form and to contribute to the development of a secondary market for such assets. The status as DLT market infrastructure should be optional and should not prevent financial market infrastructures, such as trading venues, central securities depositories (CSDs) and central counterparties (CCPs), from developing trading and post-trading services and activities for crypto-assets that qualify as financial instruments, or are based on distributed ledger technology, under existing Union financial services legislation.

(8) DLT market infrastructures should only admit to trading or record DLT financial instruments on a distributed ledger. DLT financial instruments should be crypto-assets that qualify as financial instruments and which are issued, transferred and stored on a distributed ledger.

(9) Union legislation on financial services is intended to be neutral as regards the use of any particular technology over another. Therefore, references to a specific type of distributed ledger technology are to be avoided. Operators of DLT market infrastructures should ensure that they are able to comply with all applicable requirements, irrespective of the technology used.

(10) When applying this Regulation, the principles of technology neutrality, proportionality, the level playing field, and ‘same activity, same risks, same rules’ should be taken into account in order to ensure that market participants have the regulatory space to innovate, in order to uphold the values of transparency, fairness, stability, investor protection, accountability and market integrity, and in order to ensure the protection of privacy and personal data as guaranteed by Articles 7 and 8 of the Charter of Fundamental Rights of the European Union.

(11) Access to the pilot regime should not be limited to incumbents but should also be open to new entrants. An entity that is not authorised under Regulation (EU) No 909/2014 or Directive 2014/65/EU could apply for authorisation under that Regulation or under that Directive, respectively, and, simultaneously, for a specific permission under this Regulation. In such cases, the competent authority should not assess whether such an entity fulfils the requirements of Regulation (EU) No 909/2014 or Directive 2014/65/EU in respect of which an exemption has been requested under this Regulation. Such entities should only be able to operate DLT market infrastructures in accordance with this Regulation, and their authorisation should be revoked once their specific permission has expired, unless the entities submit a complete request for authorisation under Regulation (EU) No 909/2014 or under Directive 2014/65/EU.

(12) The concept of DLT market infrastructure comprises DLT multilateral trading facilities (DLT MTF), DLT settlement systems (DLT SS) and DLT trading and settlement systems (DLT TSS). DLT market infrastructures should be able to cooperate with other market participants in order to test innovative solutions based on distributed ledger technology in different segments of the value chain for financial services.