By Victoria Jahn Head of Regulatory Affairs, 21X
The 10th June 2025 was the deadline for interested stakeholders in the finance industry – from financial institutions and FinTech providers to think tanks and investors – to respond to the consultation document issued by the European Commission on the future direction of capital markets in Europe. The objective of this consultation is to gather stakeholder feedback on obstacles to financial market integration across the EU. This effort is a key part of rolling out the savings and investments union (SIU) strategy adopted on 19 March 2025. 21X, as the first company to secure a license to operate a fully regulated DLT TSS in the European Union was eager to contribute our thoughts on the topic.
The European Union stands at a critical juncture in its ambition to become a global leader in digital finance. As the Distributed Ledger Technology (DLT) Pilot Regime (DLTPR) undergoes its initial review, 21X strongly advocates for significant adjustments, emphasizing the need for a more flexible, permanent, and commercially viable framework. The insights, provided in response to a European Commission questionnaire, underscore a clear message: to truly foster innovation and integrate DLT into mainstream financial markets, the EU must address current limitations and align its regulatory approach with global best practices.At the heart of the proposed changes is the abolition of product limitations and thresholds under Article 3 of the DLTPR.
The current restrictions, limiting DLT market infrastructures to execution-only financial instruments and the imposition of stringent market capitalization thresholds, are seen as significant deterrents. The position of 21X is that these limitations not only stifle market development but also discourage new entrants.
We are certain that removing these barriers is essential to enabling the development of a robust, competitive, and scalable DLT-based capital market within the EU, improving the investment opportunities for professional and institutional investors and accommodating a wider range of issuers beyond SMEs. Another concern of 21X revolves around ensuring the long-term usability of e-money tokens (EMTs). Article 5(8) of the DLTPR, which refers to EMTs as a fallback option when central bank money is “not practical or available,” introduces unwelcome uncertainty. The industry emphasizes that EMTs are foundational to existing business models, enabling significant efficiency gains like atomic settlement. We are calling for explicit preservation of EMT usage, even when tokenized central bank money becomes available. This, we argue, would adequately reflect the strong market demand for EMT and maintain established operational efficiencies.
Beyond specific article amendments, the response from 21X highlights several broader strategic priorities for the DLTPR. Removing time limitations related to the DLTPR: Although the European Commission’s letter to ESMA dated May 3, 2024, clarifies that the Pilot Regime has no expiration date, we believe it would be beneficial to explicitly incorporate this clarification into the regulation. Ideally, the Commission should commit to making the DLTR permanent through appropriate amendments to the relevant Union financial services legislation. Unlike traditional financial markets where permanent licenses are the norm, this limitation actively discourages institutional investment. Additionally, the licenses granted under the DLTPR should not have an expiration date. Drawing parallels with Switzerland and the UK, for example, which offer permanent or open-ended licensing frameworks, 21X stresses that such stability is crucial to encourage innovation and project scalability.
Implementing Size-Proportional Requirements (with Article 3 amendments): While acknowledging the DLTPR’s strength in fostering innovation among start-ups, we have suggested the need to adopt more flexible, size-proportional approaches akin to the UK’s Digital Securities Sandbox (DSS) and Switzerland’s DLT Act. These regimes are lauded for avoiding fixed limitations and time-limitations, promoting a more tailored regulatory environment without hindering inclusive access for smaller entities.
Clearer Regulatory Pathways to “Graduate”: The lack of well-defined and predictable transition mechanisms into the broader MiFID II and CSDR frameworks creates uncertainty for firms. Establishing a clear “graduation” pathway, thereby preserving the exemptive relief provided by the DLTPR, would support the long-term integration of DLT-based infrastructures.
When it comes to the operational aspects and inherent advantages of DLT, 21X firmly believes that DLT is a highly credible technology for trading and settlement services, and have long cited its potential to enhance transparency, enable faster and more efficient settlement (T+0 atomic settlement), reduce costs by cutting intermediaries, and support automation through smart contracts.
However, we have identified existing regulatory barriers beyond the DLTR, particularly the Basel III / SCO60 standards. 21X believes that these standards discriminate against instruments issued on permissionless blockchains by assigning them disproportionately high capital and risk treatment (Group 2 status). The finance industry is convinced that such a binary distinction is overly simplistic and contradicts the principle of technological neutrality, advocating for risk assessment based on the asset’s actual characteristics and legal structure, which would often lead to a lower risk classification (Group 1a or 1b). We are adamant that automatically assigning higher capital charges (Group 2) to tokenised assets issued on permissionless distributed ledgers is unjustified and could even destroy the emerging DLT-based financial market.
Regarding the deployment of financial services on external DLT platforms, the benefits are numerous: Cost efficiency, mitigation of counterparty/settlement risks through atomic DvP, enhanced interoperability and market access, accelerated innovation, and improved resilience through decentralization, among them. Risks, such as governance limitations and cybersecurity concerns, are acknowledged but deemed mitigable through careful platform selection (e.g., those under DLTPR) and robust legal agreements and security measures.
In summary, 21X believes that the finance industry – both FinTechs and institutions – is eager to embrace DLT’s transformative potential but is constrained by a regulatory framework perceived as overly cautious and, in some areas, misaligned with the technology’s realities. By addressing these critical points, the European Commission has the opportunity to unlock significant innovation, foster a truly integrated digital capital market, and solidify the EU’s position at the forefront of digital finance. Without addressing these regulatory issues, we believe that Europe is destined to fall behind other regions – North America and Asia, in particular – in both shaping and driving this vital industry.
