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DLT Pilot Regime: Regulatory sandbox in the EU capital market

July 27, 2023

Introduction

The DLT Pilot Regime represents an important step in the financial industry and is – along with DORA (Digital Operational Resilience Act) and MiCA (Regulation on Markets in Crypto Assets) – the outcome of the European Union’s efforts to promote the digitalization of the financial market as a part of the Digital Finance Package.
On June 02, 2022, Regulation 2022/858 was published with the purpose of piloting DLT financial market infrastructures. The aim of this is to encourage innovation and the adoption of new financial technologies by lowering regulatory barriers, while taking into account risks to consumers and institutions and market stability.
Since March 23, 2023, the DLT Pilot Regime is valid for three years, including an extension option for additional three years.

What is Distributed Ledger Technology (DLT)?

Distributed ledger technology is a decentralized database that provides each user with the same information by containing a chronological sequence of data blocks. The data blocks are chained together and contain records of digital transactions. The best-known application form of distributed ledger technology is the blockchain.

DLT market infrastructures as a regulatory sandbox

DLT market infrastructures play a crucial role in the DLT Pilot Regime. The trading and settlement of DLT-based securities is now to be regulated uniformly in the EU by the DLT Pilot Regime.
The DLT market infrastructures represent a “regulatory sandbox”, which enables a trial of trading in tokenized financial instruments based on distributed ledger technology for a specific customer base and time period on the secondary market. For this purpose, all regulations for banking and financial services do not necessarily have to be fulfilled, which is why it thus also offers young companies the opportunity to participate in the market in addition to established market participants. The aim is to promote innovation and inventiveness by reducing barriers to market entry. At the same time, it offers regulators the opportunity to address the associated challenges of new technologies.

Developments since 2023

Following some initial teething problems, BaFin granted 21X AG the first authorisation as a DLT trading and settlement system (DLT-TSS) in 2025, which became operational in May 2025. Subsequently, in June 2025, ESMA published a comprehensive report and noted a significant increase in market interest, which was further strengthened by the full implementation of the Crypto Regulation (MiCAR).

Outlook for 2026 and beyond

Looking ahead, it appears that, following its pilot phase, the DLT pilot regime will be transitioned into a permanent, more flexible framework. As early as 2025, ESMA proposed raising the strict regulatory thresholds for trading volumes and expanding the range of eligible financial instruments to enable operators to achieve economies of scale. Key drivers of this further development are the massive operational efficiency gains in the post-trade sector – for example, through real-time settlement (T+0) using smart contracts – and the reduction in reliance on fragmented legacy IT systems. International competition, particularly from the UK’s ‘Digital Securities Sandbox’, is also forcing the EU to make continuous improvements. Long-term success now depends largely on how seamlessly tokenised commercial bank money or future digital central bank currencies (wholesale CBDCs) can be integrated.

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