Unlocking the tokenized economy: EFAMA and ESMA promote more digital progress

At a glance

Both the European Fund and Asset Management Association (EFAMA) and European Securities and Markets Authority (ESMA) recently shared their take on the move towards tokenization, highlighting improved practitioner strategies and needed regulatory updates, respectively. Industry players looking to maintain market relevance should take heed, considering both as the industry is urged to make progress in its adoption of digital assets.

In June, EFAMA published Tokenisation, a Buyside Practitioner’s Guide, and ESMA published their Report on the Functioning and Review of the DLT Pilot Regime. While the latter insists on the need for a more flexible regulatory approach to foster further adoption of distributed ledger technology (DLT) across EU financial institutions, the former encourages market players to take on a more active stance and embrace the technology, underlining the risks asset managers could face if they delay adoption.

Both organizations also acknowledge that while innovation has been a priority, adoption has been limited due to operational challenges and restrictive participation thresholds of the DLT Pilot Regime. The shared conclusion is that introducing flexible, risk-based rules for a permanent DLT regulatory framework can break down barriers and encourage broader adoption.

A closer look

With a firm understanding that asset managers will face strategic risk if they fail to progress with tokenization and distributed ledger technology, EFAMA and ESMA have outlined concerns as well as proposals to remedy some of the challenges.

Strategic risks of inaction

• Asset managers relying on legacy systems face threats from agile, tech-driven entrants unencumbered by traditional infrastructure.
• DLT's operational efficiencies, such as real-time settlement and automated compliance, could widen profitability gaps between early adopters and laggards
• European Commissioner adviser Peter Kerstens warned that without swift action, Europe risks becoming a “flyover zone” in the global DLT race.

Actions proposed by EFAMA

• Immediate increase of DLT Pilot Regime’s threshold limits to increase available liquidity on DLT platforms and enhance trading volumes in the secondary market.
• Regulatory alignment on digital assets across Member States. Stronger harmonization would prevent regulatory arbitrage and help promote scale in DLT-based investment funds.
• Convergence between the regulatory frameworks for traditional assets and digital assets; as decentralized finance (DeFi) grows, there should be no distinction between the traditional ecosystem and the DLT-based ecosystem, but rather a single, integrated financial ecosystem that would include the following : 
  • Markets in Financial Instruments Directive (MiFID)
  • Alternative Investment Fund Managers Directive (AIFMD)
  • European Market Infrastructure Regulation (EMIR)
  • Central Securities Depositories Regulation (CSDR)
  • Distributed Ledger Technology Pilot Regime (DLT Pilot Regime)
  • Markets in Crypto-Assets Regulation (MiCA)
• A clear level playing field for cash-on-chain solutions. A competitive landscape that includes a digital Euro, MiCA-regulated stablecoins, and commercial bank money tokens (CBMTs) is the goal, and would signal that Europe is open to innovation and market-led forces.
• Regulatory clarification to support the adoption of tokenized money market funds (t-MMFs) as collateral in derivatives margining and repurchase transactions.

Actions proposed by ESMA

• Make the DLT Pilot Regime permanent by removing its sunset clause and codifying it into law. This will help provide regulatory clarity and incentivize long-term investment by market participants.
• Introduce flexibility and proportionality via tiered and/or adjustable thresholds, enabling more substantial experimentation at scale and providing further flexibility to applicants.
• Broaden the scope of eligible assets by including complex and illiquid assets that unlock new opportunities for applicants and investors alike.
• Embed DLT-specific provisions into existing sectoral frameworks. This will signal the EU’s commitment to modernizing its financial infrastructure.

How Deloitte can help

Forward-thinking financial institutions understand that to reap the benefits later, one must embrace the digital age now. Nevertheless, keeping track of the complex and ever-evolving legislative environment around emerging technology is not an easy task. Get support as you navigate this new environment, understand and define your digital asset strategy, and  assess whether you should apply for the DTL Pilot Regime.

Our full range of services includes business and regulatory strategy definition, target operating model design, technology implementation and tax advisory. Harnessing expertise across all subsets of digital assets, our multidisciplinary teams help investment firms, credit institutions, other financial institutions, and pure players leverage digital assets to transform their business and scale.

More specifically, Deloitte can help you:

• Craft a strategic blueprint to evaluate the costs and benefits of digital assets relevant to your business;
• Assess the impact of digital assets on your existing value chain, systems, and stakeholders to ensure seamless integration; and
• Make sense of complex regulations with a thorough gap analysis and realistic roadmap.

Deloitte’s Regulatory Watch team closely follows digital finance developments and helps you stay ahead of the regulatory curve.