On the second and final day of the inaugural edition of the Nexus2050 tech conference in Luxembourg on Thursday 27 June 2024, , head of the payment services division at the Luxembourg Financial Sector Supervisory Commission (CSSF), shared insights on distributed ledger technology (DLT), central bank digital currencies (CBDCs) and crypto- and digital assets. The session, moderated by Chris Hollifield, head of business development at Luxembourg for Finance, the grand duchy’s financial centre development agency, began with O’Sullivan highlighting the slow pace of DLT adoption in the financial world, though she acknowledged that its use is increasing.

DLT

O’Sullivan detailed that DLT applies to both financial and non-financial assets, each with distinct regulatory needs and obligations. She explained that for investment funds with native tokenised products, such as tokenised shares or units on DLT, the register can still be off-chain, requiring traditional transfer agents and conventional regulatory requirements. If a digital twin of the register is created, both on-chain and off-chain solutions are available without necessitating a new licence, as the physical register remains regulated by traditional regimes. This has no impact on investors. However, in the case of a digital-only register, regulatory requirements change, necessitating investor awareness of these changes, particularly in the tokenisation of real-world assets, which could be traded on secondary markets.

DLT pilot projects

Responding to Hollifield’s observation of the low uptake of DLT pilot projects, O’Sullivan confirmed that only six or so pilot projects using DLT had been considered by the CSSF, with none receiving final approval. She attributed the low uptake to three main reasons: the limited scope of permissible DLT applications, which exclude crypto-assets and are confined to traditional financial products like funds and shares; the restricted size of issues under the pilot regime; and the uncertainty of the pilot timeframe, initially set for three years with an additional three-year extension. After this six-year period, the future of the projects remains unclear, posing a challenge for companies contemplating significant investments in the pilot.

CBDCs

Discussing the evolution of CBDCs, O’Sullivan noted the need for central banks to adapt to new technologies is not solely driven by efficiency and ease of usability of electronic money, such as digital euro, the euro area CBDC currently under development, but also by challenging commercial solutions arising from electronic money tokens (EMTs) and stablecoins, which are emerging as alternatives to fiat money in both financial and non-financial contexts.

Mica

O’Sullivan addressed the EU’s regulation concerning markets in crypto-assets (Mica), recognising crypto-assets as a new type of fund asset class. She stated that in Europe, from a regulator’s perspective, both regulation and legislation are crucial. While regulations provide a rules-based methodology for market participants, the principles-based legislation offers future-proof stability and scalability to the markets, especially for the fast-evolving areas, such as the crypto industry. As a regulator, protecting consumer money is a priority, affirmed O’Sullivan. Together, a balanced legislation and regulatory framework provides the right set of governance and compliance guidance, facilitating effective risk management and healthy market development, said O’Sullivan.

Vasps

O’Sullivan also noted the impact of Mica on virtual asset service providers (Vasps), with Mica compliance starting from 30 June 2024. She acknowledged that Mica compliance represents a cost for all Vasps, but some entities already possess other licences, providing a foundation for compliance regulations. These entities are well-prepared to implement Mica regulations, while Vasp-only entities, despite potentially needing more substantial investments, are expected to adapt soon as well. Luxembourg has currently 13 licenced Vasps. O’Sullivan also mentioned that crypto-asset service provider (Casp) licences would become effective on 1 January 2025, allowing service providers to operate EU-wide.

Outlook

O’Sullivan admitted that regulators are on a learning curve as well with these new technologies and solutions. She agreed that the digital world is highly connected and interdependent, and thus regulations cannot develop in isolation but must evolve in a harmonised manner with partners and global stakeholders. She welcomed the EU-wide approach to create a level playing field internally, anticipating that this would be followed by a broader consensus-based approach to expand the scope and application of regulations, including Mica. O’Sullivan concluded with an optimistic outlook for financial and non-financial digital and crypto solutions to enhance efficiency, while regulators remain vigilant to maintain stable and systemic markets.