DLT AND TOKENISATION: PAVING THE WAY FOR AN ‘INTERNET OF VALUE’

Distributed ledger technology (DLT) and blockchain are progressively becoming intertwined with conventional financial services, presenting new opportunities for enhancing payment efficiency and asset management. These advancements promise to diminish friction in payment and settlement processes, create more effective liquidity management, facilitate programmability, and streamline reconciliation efforts.

The combination of DLT and tokenisation is anticipated to lead to the establishment of an ‘Internet of value’, allowing for seamless transfers of value and assets between participants without the need for intermediaries. While the extent to which this vision will materialise is still debatable, European Commissioner Maria Luís Albuquerque indicated last December that these technologies might emerge as the foundational operating system for future financial markets.

The rise of crypto-asset trading is significantly influencing the demand for reliable on-chain settlement assets, resulting in a parallel increase in the need for stablecoins. Currently, the majority of stablecoins are pegged to the US dollar, mirroring the predominant pricing of most crypto-asset markets in USD. As the process of tokenising traditional financial instruments—like shares, bonds, and investment funds—proliferates on distributed ledgers, it will generate further demand for tokenised settlement mechanisms or currencies aligned with the underlying financial instruments.

Although stablecoins have the potential to boost efficiency for specific cross-border transactions, where traditional bank systems are often costly and inefficient, their impact in the EU’s swiftly evolving and competitive retail payments landscape appears relatively limited. Furthermore, the market capitalisation of stablecoins remains minor compared to traditional finance. However, establishing a robust ecosystem of euro-denominated stablecoins could bolster the euro’s international status while also advancing a resilient and competitive European digital economy.

On the other hand, the development of tokenised deposits has yet to gain significant momentum. These deposits maintain the existing two-tier monetary structure while enabling programmable settlement options. Their most promising uses are likely to be found in treasury operations, liquidity management, and the settlement of tokenised securities across Europe. However, their non-bearer attribute makes them less applicable for global transactional purposes.

In the European Union, efforts to explore central bank digital currency (CBDC) applications for both retail and wholesale sectors are actively underway. The digital euro aims to facilitate sovereign retail transactions while strengthening strategic autonomy in a rapidly digitalising economy. Concurrently, the European Central Bank (ECB) is investigating wholesale solutions through initiatives like the Pontes and Appia projects, which aim to offer risk-free settlement for tokenised financial dealings whilst ensuring compatibility with central bank currency. While stablecoins could theoretically act as a settlement mechanism for tokenised assets, a wholesale CBDC would ensure the provision of secure and final transactions supported by DLT, thereby maintaining financial stability. Given the absence of plans for a wholesale US dollar CBDC, a euro-based CBDC could enhance the euro’s attractiveness as a global settlement currency in tokenised markets.

Europe has positioned itself as a forerunner in the regulation of crypto-assets. The Markets in Crypto-Assets Regulation (MiCA), which was approved in 2023 and became fully enforceable by December 2024, introduces a coherent regulatory framework for crypto-asset service providers and issuers, including those of stablecoins. This regulation establishes foundational prudential, governance, and reserve requirements for asset-referenced tokens and electronic money tokens. Nonetheless, it is important to note that MiCA does not encompass tokenised deposits or securities, which are instead governed by the existing regulatory frameworks for banking and securities.

To stimulate innovation, the EU has also initiated the DLT Pilot Regime Regulation, allowing market players to experiment with the trading and settlement of tokenised shares, bonds, and UCITS (Undertakings for Collective Investment in Transferable Securities) under specific exemptions from regulations like MiFID II and CSDR, while ensuring investor protection and market integrity. Participation in this pilot scheme has been relatively modest, leading the Commission— as part of its broader objectives to foster a savings and investments union—to propose an extension of both the duration and the scope of this regime to enhance competitiveness and scalability. This initiative is particularly significant as countries worldwide increasingly adopt DLT and tokenisation within their capital markets.

John Berrigan serves as the Director-General of the Directorate-General for Financial Stability, Financial Services, and Capital Markets Union (DG FISMA) of the European Commission. This article was initially published in the March edition of Eurofi Magazine.