Over the past few years, there has been much chatter about tokenizing everything from fiat currencies to real estate. One of the key areas ripe for tokenization is stocks, bonds, and other financial instruments.
Under a new European Union (EU) pilot program, which has been agreed upon and will likely be officially passed in Q1 or Q2 2022, some existing legal requirements are waived to allow for the issuance of certain financial instruments on blockchain and digital ledger technology.
“DLT can bring a number of potential benefits in the provision of financial services, including reduced complexity, improved end-to-end processing speed, strengthened network resilience, and reduced operational and financial risks,” lead MEP Johan Van Overtveldt said.
What is the pilot program, and why is the EU running it?
- The program will allow financial markets in the EU to use blockchain technology.
- It’s officially named the Pilot regime on distributed ledger technology market infrastructures.
- It applies to the tokenization of stocks, bonds, and the EU version of mutual funds called UCITS.
- Certain financial limits will apply. For stocks, it will be up to €500m, for bonds, it will be up to €1 billion; and for corporate bonds, it will be up to €200m.
- Newcomers are also allowed to participate in the program, but they’ll be subject to the same rules and regulations as established firms.
- The pilot program has been launched because some of the existing EU rules are so restrictive that the potential benefits of blockchain and DLT are lost.
- The program will also allow for settlement in different currencies. While central bank money is preferred, it will also allow tokenized commercial bank money, fiat-backed stablecoins, and e-money tokens.
- The program will likely last for three years and could be made permanent. Whether to extend it or not will be decided every three years.
The correct way to tokenize financial instruments
The EU’s pilot program demonstrates the correct way to approach the tokenization of financial instruments. First, it must become legal in the relevant jurisdiction, and then it needs to be approached in a carefully thought out, planned, and initially limited way that protects investors and wider financial markets.
Unlike the Wild West approach taken so far, which has seen platforms like Terra issue tokenized derivatives of real-world stocks, but which give no actual ownership of the company nor any investor protections, the EU’s approach is investor-friendly, legal, and is properly regulated.
Satoshi’s invention unleashed a world of financial innovation
As this report and others make clear, money and financial markets are undergoing a wave of change and innovations, the likes of which they haven’t seen since the invention of the internet. It’s all thanks to Satoshi Nakamoto’s invention of Bitcoin, now restored to its original state as BSV.
Things are still in their early days, and we’ll likely witness fast-paced innovation for the next couple of decades. However, the time will come when everything will need to work on a scalable, energy-efficient blockchain that can serve many different purposes.
There’s only one blockchain that can scale big enough to serve as the backbone for this new global financial infrastructure. It is Satoshi’s original design.
Watch: CoinGeek New York panel, Bitcoin & Blockchain – Can Real Value Come From Real Utility?
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