La Digital transformation of global financial markets is an irreversible process that is proceeding at an accelerating pace: those who cannot keep up are destined to lose competitiveness. Europe is realizing that it has some ground to make up in this race and is slowly trying to create an economic and regulatory environment conducive to coordinated experimentation by the various EU member states in the field of digital finance.

The DLT Pilot Regime is an example of this effort: a temporary experimental regulation designed to explore the possibility of using blockchain in capital markets as an infrastructure for issuing and buying and selling alternative financing instruments for businesses.

In this article we illustrate the regulatory content of the DLT Pilot Regime, but more importantly we delve into the opportunities that this opening up of capital raising with asset tokenization can bring to Italian companies.

What DLT means

DLT stands for. Distributed Ledger Technology, in Italian Distributed Registry Technology. This is an online data and activity logging and sharing technology based on distributed and decentralized registries, where each node in the network holds a synchronized copy of the transactions and data in the registry and there is no single central control server. 

How does a DLT work?

1. Any transaction or addition of data to the registry requires the approval of a majority of the network participants, overriding the need for an intermediary with authority to validate transactions (e.g., a notary or financial authority, in the case of financial transactions or transfers of ownership). 
2. The data related to each activity is transparent and protected: date, type of operation, users involved, conditions, etc., are encrypted and non-modifiable elements once recorded on the DLT, and all nodes in the network or anyone receiving authorization can consult them.
3. A distinction is made between DLT permissioned (restricted access) and permissionless (public), such as Bitcoin and Ethereum. 

La decentralization and protection from manipulation are the two key features that fuel DLT's potential as an innovative tool to facilitate economic and financial exchanges and transactions by reducing red tape, costs and barriers between bidders and buyers.

Warning: people often use "blockchain" as a synonym for "DLT," but in reality the blockchain Is only one type of DLT. 

DLT Pilot Regime: what the European regulation says.

The DLT Pilot Regime went into effect in 2023 with the aim of filling the regulatory void and overcoming regulatory constraints that made it effectively impossible to exchange and liquidate crypto-assets of a financial nature. 

For "crypto-assets of a financial nature" means all digital assets that are considered to be financial instruments in the same way as traditional financial instruments in terms of their behavior, and are therefore subject to MiFID regulations. Excluded, however, are crypto-assets included in the MiCA Regulations.

EU Regulation 2022/858, therefore, introduced this temporary rules regime that allows derogations from some MiFID II and CSDR rules, offering operators a controlled temporal and technological perimeter to test blockchain-based infrastructures.

In essence, it is a regulatory sandbox inviting authorized financial intermediaries to experiment with new forms of issuing, trading and settlement of Security token, under the supervision of the relevant authorities. 

Thanks to the waivers, for example, crypto-asset issuing and trading infrastructure can be developed by operators who would not normally qualify for financial intermediation, and transactions registered in ways that do not meet the transparency and disclosure requirements for traditional financial instruments can be considered valid.

The regulation for now provides for a three-year time window, from 2023 to 2026, extendable for three more, then to 2029.

In Italy, this European Regulation has been assimilated with the Fintech Decree (Law No. 52/2023), which designated Consob and the Bank of Italy as the competent authorities for authorizing DLT infrastructure.

The assets involved

The pilot scheme covers Security tokens, which are digital assets that can be likened to financial instruments, and limits experimentation to financial instruments with specific size requirements:

• Shares with capitalization < 500 million euros
• Bonds with issue volume < 1 billion
• Units of UCITS with value < 500 million

Thus, the preferred target audience seems to be SMEs, which are easily adapted to these requirements and are also the enterprises that could most benefit from more accessible ways of raising capital.

DLT infrastructure

The regulation authorizes three types of financial infrastructure:

• DLT MTF (Multilateral Trading Facility) : platform for multilateral trading of security token
• DLT SS (Settlement System): system for finalizing transactions
• DLT TSS (Trading and Settlement System): integrated asset trading and settlement system

Goals of the DLT Pilot Regime

What are the aims that the European Union set out to achieve with the DLT Pilot Regime?

• Encourage experimentation with new financial solutions to keep the market and European businesses at the forefront
• Expanding businesses' access to capital
• Field test the opportunities, critical issues, risks, and benefits of DLT and tokenization of financial instruments in order to gather material for future final legislation
• Create a safe environment for experimentation, with a balance between freedom of initiative and protection of investor market stability
• Encourage the development of uniform regulation throughout the European Union to avoid regulatory gaps in cross-border operations and pursue the creation of a single capital market, including on a digital level.

As a temporary regime, the DLT is only a first step in a journey that must continue in order to reap its benefits and requires the commitment of legislators, service providers, financial authorities and businesses.

Opportunities and risks for businesses

La Distributed Ledger Technology (DLT) offers companies new ways to raise capital, particularly STOs (Security Token Offerings).

The conversion of real assets (stocks, bonds, real estate, future revenue streams) into digital tokens tradable on blockchain can be more affordable for an SME than traditional financing channels and also offers other valuable opportunities:

• Access to investors from around the world
• Possibility of splitting investments
• Ability to offer liquid assets with dedicated secondary markets
• Reducing brokerage costs
• Transparency and traceability of transactions

An STO is thus presented as an innovative type of crowdfunding campaign that allows businesses to raise capital independently online By a multitude of investors. 

Italian SMEs that take advantage of this opportunity could gain an important competitive advantage. To do so, however, it is necessary to have specific technological skills or to rely on specialized consultants, as well as to carefully check the regulatory compliance of operations with a lawyer.

In Italy, there are no operators who have taken advantage of the DLT Pilot Regime to offer infrastructure for buying and selling Security Token, due to the technological backwardness of our country and some logistical and regulatory criticalities that are a source of uncertainty. In the rest of Europe, however, some service providers can be accessed on DLT.

Services on DLT in Europe

Italian companies can take advantage of foreign DLT infrastructure for the issuance and placement of Security tokens, subject to verification of Consob and Bank of Italy approval and any regulatory discrepancies between the two countries. Let's look at some examples: 

• D7 of Clearstream, a platform for issuing and managing digital bonds.
• Securitize, Spanish platform for the issuance of Security token 

• Tokeny Solutions, Luxembourg platform for issuing, managing and transferring digital assets. 
• DigiShares, Danish platform for tokenization of real estate assets
• Brickken, Spanish platform for tokenization of real estate and financial assets
• 21X, DLT TSS platform for Security token 
• Cashlink, German platform for the issuance, registration and safekeeping of Security token
• TokenBridge, a service of equity crowdfunding platform Beesfund for tokenization of stocks, bonds and other financial instruments
• RealEstate.Exchange (REX), tokenized real estate asset trading platform
• Axiology, a German platform that provides an infrastructure for trading and settlement of digital securities.

Turbo Crowd works with Italian and European partners active in the area of asset tokenization and offers marketing advice for this type of operation as well.