Bonds using distributed ledger technology are on the horizon. They've been there a long time. They are likely to stay there a while longer.
DLT bonds, which so excite the tech-savvy among capital markets specialists, are proving slow to actually introduce. It has been at least 10 years so far.
Asked what the product needs to achieve liquidity and mass adoption, market participants this week told GlobalCapital: “fix the pilot regime”.
The pilot regime is a flexible regulatory shelter to allow market participants to experiment with the new technology.
In particular, it is meant to enable secondary market trading — one of the pieces missing from the DLT puzzle, which is needed to attract investor uptake.
The pilot regime does this by exempting DLT operators from certain obligations on trading and settlement under the Markets in Financial Instruments Directive II and Central Securities Depositories Regulation.
This testing environment should allow operators of market infrastructure to run experiments in trading DLT bonds, for the purpose of guiding regulation.
But, more than a year since its launch, the results show the regime has been too rigid and it did not encourage a lot of experimentation.
The application process alone is so stringent that many market infrastructure operators have not bothered applying. It is too time-consuming, and therefore too expensive, to get a licence.
This kind of complaint shouldn’t exist for a regulatory sandbox. If you’re creating a safe space for innovation, the last thing you need is a huge barrier to entry, which once you manage to get over, you fall in a maze of red tape.
The regime needs to be accessible and encourage a range of operators to experiment. Otherwise, it’s not a sandbox. It’s just another concrete corridor — and who wants to play in that?