Which Companies are Favored by the EU Pilot Regime?

The European Union has approved the DLT Pilot Regime, which will exempt companies that facilitate trading of tokenized securities from compliance with current regulations. This has generally been a welcome initiative and one that we at Token City consider very positive. However, some market participants have a diverging perspective, specifically the larger ones. Companies such as BNY Mellon, responsible for the custody of $43 trillion in assets, or BNP Paribas, complain that the Pilot Regime's volume limits are insufficient for most of their clients.

This is because, under the Pilot Regime, any DLT platform must have a maximum securities issuance limit of €6 billion, or a maximum market capitalization of €9 billion. In addition, each primary issuance of assets is capped at €500 million for equities and funds, and €1 billion for bonds.

For larger companies, these limits understandably complicate their participation in the Pilot Regime while, for smaller players, the limits offer a fantastic opportunity to develop their technology and grow their businesses, allowing them to grab a bigger piece of the pie.

In fact, according to the European Commission, SMEs account for 99% of all EU companies, with two-thirds of EU employment and almost 60% of EU value added. Arguably, the Pilot Regime has been designed for them, especially given that three-quarters of SME financing in the EU is still provided by the banking sector, something that will start to change once SMEs across the EU issue and enable trading of securities under the Pilot Regime. 

But all the above does not mean that large companies will not participate in the Pilot Regime, they certainly will. They want to take advantage of the shift to faster and cheaper technology, and they also see their participation as a message to ESMA (European Securities and Markets Authority) that the book-entry registers of central securities depositories are obsolete.