Regulatory obstacles to organised trading in security tokens

Abstract

The success story of the crypto-economy is undeniable. Crypto has gradually been making headway into the traditional financial sector. Acceptance of and demand for distributed ledger technologies (DLT)-based securities are on the rise. ‘Initial token offerings’ (ITOs) or ‘security token offerings’ (STOs) are on the verge of entering the mainstream — especially in the realm of small and medium enterprise (SME) financing. The borderline between the traditional financial markets and the crypto-economy is starting to blur. The players in the financial markets, however, are not the only ones beginning to realise the potential of Blockchain, and, more generally, DLT. The public sector is also slowly waking up. Recent developments include new legislation in Liechtenstein, France and Germany, as well as various initiatives in other member states. Amid all this enthusiasm and optimism, there is one issue that undeniably still dampens the mood: current EU financial markets law poses significant, and in some cases insurmountable, obstacles to the integration of DLT-based assets into the traditional financial system. In this paper, we analyse what currently appears to be the most pressing of these issues. These are the strict and inflexible rules of the Markets in Financial Instruments Directive/Markets in Financial Instruments Regulation (MiFID1/MiFIR2) regimes and the Central Securities Depositories Regulation (CSDR) in the area of post-trade securities settlement that do not do justice to the characteristics of DLT and that at present almost completely prohibit any organised trading in DLT-based securities.