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Despite crypto’s rocky ride, central authorities are still experimenting with distributed ledger technology. Sarah Kocianski reports. 

Stories of corruption and company collapse in the crypto industry have been mainstream news recently, causing major financial institutions to wash their hands of any association with the space.

However, the underlying technology on which many crypto companies’ products were built has not suffered the same fate. For example, the EU recently launched its distributed ledger technology (DLT) pilot regime, part of the European Commission’s (EC) digital finance package. 

As with any technology, DLT has myriad uses, many of which have nothing to do with crypto and offer significant opportunities for improvement in legacy financial services infrastructure. The EU regime, according to the EC package, “allows for temporary derogations from existing rules subject to conditions and safeguards, [and] aims to enable market participants to operate a DLT market infrastructure (a DLT multilateral trading facility, a DLT settlement system or a DLT trading and settlement system) by establishing clear and uniform operating requirements”. 

Until now, companies in the EU wanting to experiment with DLT within capital markets have been largely unable to do so on any scale, due to a lack of clarity on whether it broke regulations, says Daniel Sheridan Ferrie, an EC spokesman. The pilot regime addresses this lack of clarity and opens up the opportunity for companies to start testing DLT infrastructure within three specified areas: multilateral trading, settlement, and trading and settlement. 

The EU’s move follows that of other global regulators, notably in Asia, where the Monetary Authority of Singapore was one of the first to conduct a pilot scheme in this area, causing some excitement in the industry. 

According to Alisa DiCaprio, chief economist at DLT specialist R3, it represents “an important opportunity for those of us working in DLT and financial services”. She adds: “By providing the regulatory framework to apply DLT across a range of use-cases, the pilot will enable companies to explore the ways in which this technology can make the financial sector more efficient while reducing risk and increasing profitability.”

However, the journey towards achieving those ends has just begun. The pilot is just that: a toe dipped into the waters of a new technology by regulators seeking to better understand its benefits and pitfalls. The official assessment of the initiative is not due to be delivered until March 2026, and that is only the starting point for any changes in regulation that might lead to industry-wide adoption. Ms DiCaprio says that the outcome “depends on what comes out of the pilot, what can be adopted, and how quickly it can be acted upon”. 

There are also those who are less confident that the three areas mentioned are the right ones to start with when looking to unleash the potential of DLT. Virginie O’Shea, founder of capital markets focused Firebrand Research, says: “DLT as it currently operates isn’t the most logical choice for a trading system and not even for a high-volume settlement system. The biggest issue is that it could introduce latency and inefficiency into the process.” 

Ms O’Shea gives the example of the Australian Stock Exchange (ASX), which wrote off a six-year-long experiment to move its core infrastructure to a distributed ledger last year, to the tune of a A$170m ($113.7m) loss. The episode “highlighted some of the issues that financial markets infrastructure platforms could experience as part of a DLT implementation” and that ultimately in this case, it was determined that DLT was not suitable for supporting equities clearing and settlement “due to scalability and operational issues”, she says. 

On balance, it seems the pilot regime is a step in the right direction since it at least allows for experimentation with DLT, and is an admission by regulators that current rules are probably no longer fit for purpose, given technology’s constant advances. That is a win for the innovators within capital markets, like R3, which will be supporting its clients that choose to participate in the pilot, and helping them make the most of the opportunity it presents. 

In terms of whether DLT will end up being a core part of financial services infrastructure and achieving all the promise it holds — increased transparency, accuracy and efficiency — that remains to be seen, but one thing is certain: it will not happen quickly. 


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