When European regulators launched their pilot regime for financial market participants to try out distributed ledger technology in March 2023, they expected it to attract 20 applicants by the end of the year.
Eighteen months later, there have only been four — and so far, none have been approved into the regime.
Capital market specialists are disappointed that the regime — a form of regulatory sandbox to encourage innovation — did not have the uptake they expected.
It was meant to enable market infrastructure players to get exemptions from the Central Securities Depositories Regulation or MiFID II, allowing them to apply DLT in their business models.
If market infrastructure organisations could work out how to host DLT bonds, the market would be able to trade them and create a liquid secondary market.
That is the goal of the DLT pilot regime.
But although it has not thrived, that does not mean there is no secondary market for DLT bonds.
Clearstream and Euroclear have successfully issued DLT bonds and supported secondary trading of them, and neither is an entrant to the pilot regime.
Each created its own bespoke DLT platform — Clearstream's D7 platform and Euroclear's DFMi — without needing regulatory waivers.
The market may find itself with a functioning secondary market without using the EU pilot regime at all.
If the current state of affairs continues and more market infrastructure players find they can host DLT bonds in full compliance with current legislation, then the pilot regime was not as vital as the market may have thought.
Bonds are not the only things included in the pilot, and the regime may still be useful for testing market infrastructures for trading equities and funds, so it's not like the regime will be obsolete.
But for the DLT bond market, if players can issue and trade bonds without needing to waive the rules, then it’s not a disaster that the pilot regime has not taken off. And it certainly won't be a sign of a faltering DLT bond market if it never does.