DLT survey “slow but growing:” CSSF’s Karen O’Sullivan

On the second and last day of the first edition of the Nexus2050 technology conference in Luxembourg on Thursday 27 June 2024, head of the payment services department at the Luxembourg Financial Sector Supervisory Commission (CSSF), shared insights on distributed ledger technology (DLT). , central bank digital currencies (CBDCs) and crypto and digital assets. The session, moderated by Chris Hollifield, head of business development at Luxembourg for Finance, the grand duchy’s financial center development agency, began with O’Sullivan highlighting the slow pace of DLT adoption in the financial world, although she acknowledged that its use is increasing. .

DLT

O’Sullivan explained that DLT applies to both financial and non-financial assets, each with distinct regulatory needs and obligations. She explained that for investment funds with native tokenizing products, such as tokenized shares or units on DLT, the registry may still be off-chain, requiring traditional transfer agents and conventional regulatory requirements. If a digital twin of the registry is created, both on-chain and off-chain solutions are available without the need for a new license, as the physical registry remains regulated by traditional regimes. It has no impact on investors. In the case of a digital-only registry, regulatory requirements are changing, necessitating investor awareness of these changes, especially in the tokenization of real assets, which can be traded on secondary markets.

DLT pilot projects

In response to Hollifield’s observation of the low uptake of DLT pilot projects, O’Sullivan confirmed that only six or so pilot projects using DLT had been considered by the CSSF, with none receiving final approval. She attributed the low uptake to three main reasons: the limited scope of allowable DLT applications, which exclude crypto-assets and are limited to traditional financial products such as funds and stocks; the limited size of issues under the pilot regime; and the uncertainty of the pilot timeframe, initially set for three years with an additional three year extension. After this six-year period, the future of the projects remains unclear, posing a challenge for companies considering significant investments in the pilot.

CBDCs

Discussing the evolution of CBDCs, O’Sullivan noted that the need for central banks to adapt to new technologies is not only driven by efficiency and ease of use of electronic money, such as digital euro, the euro area CBDC currently being developed, but also through challenging commercial solutions arising from electronic money tokens (EMTs) and stablecoins, which are emerging as alternatives to fiat money in both financial and non-financial contexts.

Mika

O’Sullivan addressed the EU’s Markets in Crypto Assets (Mica) regulation and recognized crypto assets as a new type of fund asset class. She said that in Europe, from a regulator’s perspective, both regulation and legislation are crucial. While regulations provide a rules-based methodology for market participants, the principles-based legislation provides future-proof stability and scalability to the markets, especially for the fast-developing areas, such as the crypto industry. As a regulator, protecting consumer money is a priority, O’Sullivan confirmed. Together, a balanced legislation and regulatory framework provides the right set of governance and compliance guidance, facilitating effective risk management and healthy market development, O’Sullivan said.

Vaspe

O’Sullivan also noted the impact of Mica on virtual asset service providers (Vasps), with Mica compliance starting from 30 June 2024. She acknowledged that Mica compliance represents a cost for all Vasps, but some entities already have other licenses, which provide a foundation. for compliance regulations. These entities are well prepared to implement Mica regulations, while Vasp entities, despite possibly requiring more substantial investments, are also expected to adapt soon. Luxembourg currently has 13 licensed Vasps. O’Sullivan also mentioned that crypto-asset service provider (Casp) licenses would come into effect on January 1, 2025, allowing service providers to operate EU-wide.

Outlook

O’Sullivan acknowledged that regulators are also on a learning curve with these new technologies and solutions. She agreed that the digital world is highly connected and interdependent, and therefore regulations cannot evolve in isolation, but must evolve in a harmonized way with partners and global stakeholders. She welcomed the EU-wide approach to create a level playing field internally, expecting it to be followed by a broader consensus-based approach to expanding the scope and application of regulations, including Mica. O’Sullivan concluded with an optimistic outlook for financial and non-financial digital and crypto solutions to improve efficiency, while regulators remain vigilant to maintain stable and systemic markets.