- This paper sets out a vision for the future DLT-based architecture for European capital markets as well as makes recommendations to European policymakers in relation to the development of policy and infrastructural frameworks in line with this envisaged trajectory.
- To enable connectivity, integration, efficiency, competition and innovation for European capital markets, AFME envisages the development - over the medium term - of a DLT-based architecture for European capital markets that consists of:
- A multi-chain DLT network consisting of asset ledgers operated by regulated financial institutions, with interoperability protocols enabling cross-ledger connectivity. A role for public-sector ledgers is envisaged for DLT-based central bank money and connecting market-run asset ledgers.
- Public-permissioned ledger setups to provide widespread but regulated access for market participants, with different ledgers providing technical and governance arrangements tailored to one or multiple (financial) asset classes (see figure 2).
- Delivering on this vision requires coordinated policy and infrastructural actions between public and private-sector actors, which are set out in Part II of the paper. In particular, the paper recommends, as immediate priorities:
- Recognition of asset interoperability in policy frameworks. Interoperability standards at asset, token/smart contract, and protocol layers should be agreed and developed through public-private collaboration. In particular, the legal and regulatory framework should evolve to recognise the asset transferability and control mechanisms and operational settlement finality provided by DLT.
- Progress on making DLT-based central bank cash solutions available (e.g. Pontes), alongside DLT based commercial bank money solutions. For Europe to maintain its lead in creating capital markets of the future, providing certainty on DLT-based cash solutions is key.
- Public-private cash ledgers as a way forward for accommodating different forms of DLT-based cash solutions (central bank, commercial bank, stablecoins) on a cross-currency and cross jurisdictional basis, with the aim of minimising cash liquidity fragmentation. In addition, public ledgers can play a role in enabling collateral mobilisation for monetary-policy purposes.
- A careful approach to public asset ledgers. Because market-run asset ledgers, connected through interoperability solutions, present the most viable way forward for scaling, public sector authorities should carefully assess if public asset ledgers can add any value without undermining existing investments from market participants.
- Collateral eligibility for all DLT securities. Authorities should immediately focus on enabling the use of DLT-based assets as collateral in central bank credit operations. This can be achieved by clarifying the application of the collateral eligibility framework to DLT-based assets, recognising asset controls and movement by non-CSD DLT platforms, and integrating these platforms into the collateral mobilisation architecture.
- Delivery of complementary EU regulatory reforms enabling network-based settlement. European authorities should urgently conclude reforms to establish a permanent regime for DLT-based capital markets infrastructures that enables regulated, distributed, and network-based transactions and settlement at-scale.