European Commission eyes December proposals tied to RWA tokenization, adviser says

The European Commission is expected to make proposals on the Savings and Investment Union (SIU) that include elements of financial instrument tokenization, according to an adviser at the Commission.

In an interview with The Block at Taipei's FintechOn Summit on Tuesday, Peter Kerstens, an adviser to the European Commission, said there is no urgent need for a "MiCA 2.0" for now. Instead, he suggested that regulators should focus on studying the tokenization of real-world assets,

Kerstens said the Commission is on track to present proposals about SIU in December. The SIU, a program aimed at fostering a pan-European financial market, seeks to channel savings into cross-border investments across the EU, according to the IMF.

"In building the Saving and Investment Union, we also want to exploit or make use of distributed ledger technology as far as we can," said Kerstens.

"I do think that what we should focus on — rather than trying to correct or improve MiCA — I think we should focus on something much bigger, much more important, which is the tokenization of financial instruments, also called real-world assets. So [that's] the use of blockchain technology in equity markets, debt markets, derivatives markets," said Kerstens.

Markets in Crypto-Assets (MiCA) framework, which came into full effect at the end of last year, establishes comprehensive guidelines and regulations for crypto assets across the European Union trading bloc. MiCA primarily regulates crypto asset issuers and service providers.

Increasing TradFi interest in crypto

Kerstens, who's often referred to as the father of MiCA, said that when MiCA was proposed in 2020, "we also did on the side the DLT Pilot Regime, which was a regulation to experiment with the use of distributed ledger technology in securities markets."

The EU's DLT Pilot Regime took effect in March 2023, providing a legal framework for trading and settlement of transactions in crypto-assets that qualify as financial instruments, according to the European Securities and Markets Authority (ESMA). It mainly covers DLT trading and settlement systems.

Kerstens noted that initially, there was limited TradFi enthusiasm, with securities firms and banks showing little interest in the technology. However, he observed a significant transformation over the past five years. 

"Five years ago, you would have great difficulty finding a bank wanting to entertain the idea of dealing with assets on a public blockchain. Now they're ready for that. But the regulatory framework around it isn't adapted to that," he added.

RWA push

As part of its study of the tokenization of RWA, the Commission intends to upgrade the DLT Pilot Regime to "make it more useful," said Kerstens.

"Personally — that's my personal view — I am convinced that the financial markets will end up being tokenized to a very large extent," he said.

Meanwhile, through the SIU initiative, the European Commission aims to modernize capital markets across the European Union, Kerstens said. 

"We have big capital markets, but they are fragmented," he added. "We have 27 small capital markets, [but] we want one big capital market. In order to do that, we want to make use of what we call the latest generation of technologies because we think that blockchain is a strong integrating power to overcome national barriers."

Kerstens' remarks align with comments made by ESMA Executive Director Natasha Cazenave during a speech on Monday in Dubrovnik.

"Tokenisation, or the representation of financial instruments in digital form on distributed ledgers, is one such technology with the potential to bring significant efficiency gains," Cazenave said. "This is not just a technological evolution. It could lead to a transformational change of our markets."