On April 30, 2021, The European Central Bank (ECB) released a report by the Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo), that provides a thorough review of the current use of distributed ledger technology (DLT) by European market participants in securities post-trade processes in accordance with the regulation.

The report is divided into 3 chapters which are briefly summarised below.

The Regulatory, governance and interoperability considerations in a DLT environment

This chapter includes:

1/Key considerations on digital assets and the related regulatory framework relating to use of DLT in the post-trade environment including:

• Regarding the taxonomy related to issuance and tokenisation of assets, the AMI-SeCo encourages a harmonised approach to the issuance of digital assets and to tokenisation.

• The report suggests to clarify the function of holding private keys in safekeeping, that would allow stakeholders to have a common understanding of the implications of using private keys in the context of DLT-enabled custody services (i.e., clarification on whether they are a mean of safekeeping or proof of ownership, or whether they provide for the validation of a transaction). Clarification is also needed on whether custody of tokens representing securities is limited to the safekeeping of private keys, which would impact the current service model and related responsibilities.

2/Governance of DLT-based systems

• The report outlines the necessity to implement a new model of communication to support the transition from a traditional system to a DLT environment that may require additional functions to be identified (functions that may be subject to regulatory licences or authorisation).

• The report recommends that issuers of digital assets adopt new technological structures and develop advanced competencies to fulfil their roles and functions as both issuers of digital assets and nodes of the DLT network with the possibility to outsource this function to a third-party provider.

• The report also outlines that existing tools for custody may require the deployment of new technical solutions to address the risk of misappropriation of digital assets.

3/Interoperability of DLT-based systems

The report puts an emphasis on the current lack of interoperability across DLT-based solutions developed in the post-trade environment and stresses the importance of interoperability between DLT systems to prevent market fragmentation.

Interoperability should be achieved between: (i) DLT networks and existing infrastructures, and (ii) between different DLT-based systems.

Identification of practices and key implications relating to the issuance or recording and post-trade handling of securities in a DLT environment

This chapter presents 2 models, namely:

1/Model 1 – Securities issued as native digital assets

In this model ‘securities do not have any other representation outside the DLT network (and the ledger where the native digital assets are recorded constitutes by itself the relevant – and only – bookkeeping system’. This model is used mainly for the purpose of bespoke over-the-counter (OTC) transactions or private placements.

2/ Model 2 – Securities issued in the conventional systems and enabled in the DLT environment

In this case, securities are initially issued within the traditional system, while the recording and post-trade handling of the securities is subsequently enabled in a DLT environment.

Key features of using DLT for issuance, custody and settlement.

1/Issuance, recording and redemption of securities in the DLT environment

This section outlines the positive aspects of issuance via distributed ledger and clarifies how certain functions (e.g. accountability, legal validity) are performed in legacy systems and systems relying on DLT.

2/Custody and Safekeeping in a DLT environment

Presents the various of custody and safekeeping arrangements that exists in the different models and compares the latter with those in conventional systems.

It also outlines the different aspects related to account structure and asset servicing and their functioning in DLT and provide a description of the key implications relating to the custody and safekeeping of securities in DLT-based systems for market stakeholders and financial market infrastructures.

3/Settlement in a DLT environment

This section provides a description of related business and operational processes applicable to the different models as well as the technical, business, regulatory and governance implications related to clearing and settlement in a DLT environment.

The report provides a solid insight on the use of DLT in the current regulatory landscape. It outlines the related challenges caused by the lack of interoperability and provides recommendation on how market participants should ensure interoperability if the technology is to succeed.