- AFME highlights the urgent need for central bank money settlement and collateral eligibility for tokenized securities in the EU.
- European Central Bank (ECB) is working on interim and long-term settlement options for digital assets.
- Current laws complicate collateral eligibility for digital securities not registered with central securities depositories.
The Association for Financial Markets in Europe (AFME) released a paper today outlining two major steps for scaling distributed ledger technology (DLT) in Europe’s capital markets. AFME stated that an immediate settlement solution for digital assets using central bank money is urgently needed. The association also called for tokenized securities to be eligible as collateral for banks accessing central bank liquidity.
The European Central Bank (ECB) announced in February plans for DLT-based settlement using central bank money. According to AFME, the ECB is planning an interim solution to be implemented soon, followed by a long-term wholesale central bank digital currency (wCBDC) option. Recent tests involved 64 organizations using three technologies: two connected to payment systems and one wCBDC.
AFME described intraday repo transactions as one important use case for these settlement options, citing preparations by Deutsche Boerse’s Eurex. The group also asked the ECB to extend Target 2 operating hours. AFME requested that pre-funding requirements for both the TIPS settlement and the wCBDC platforms be reconsidered, stating that fragmented liquidity across multiple cash pools is problematic.
After last year’s DLT industry trials, AFME made recommendations focused on interoperability between the payment systems and digital asset ledgers to ensure atomic settlement. Atomic settlement means both sides of a transaction must succeed or fail together. The association cautioned that tools used during trials, such as cancellation keys and timeout management, might not suit production environments, as they can undermine atomic settlement. AFME encouraged the ECB to consult legal experts about the status of transactions where only part of a settlement completes.
Collateral eligibility for digital securities remains complex. AFME noted that, to qualify as collateral for central bank loans, securities must meet several criteria. If a digital security operates under the EU’s DLT Pilot Regime, it can qualify—but only two infrastructures so far hold such licenses, with just one operational.
AFME pointed out that most digital assets do not interact with central securities depositories (CSDs), yet current rules require CSD registration for eligible collateral. According to AFME, this makes it challenging for DLT-based securities to be listed on exchanges, a general collateral requirement. AFME suggested regulators accept entities under frameworks like MiFID II or CRD/CRR as eligible, with contractual agreements substituting for certain legal finality requirements.
This approach may benefit existing regulated companies. However, Germany’s concept of crypto securities registrars allows startups, approved by BaFin, to participate in the market. These registrars are regulated differently and currently fall outside major EU financial rules. For further reading, see AFME’s full paper, “Scaling DLT Capital Markets – Enabling Central Bank Money Settlement and Collateral Eligibility for DLT-based Securities,” here.
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