This chapter deals in detail with the tradability of crypto shares and illuminates the possibilities, challenges, and regulatory framework conditions for trading on regulated and unregulated markets. Special attention is given to the EU’s DLT Pilot Regime and the MiCAR regulation for the future development of crypto share trading.

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Regulated Markets (Exchanges, MTFs): Hurdles and Perspectives

Trading in traditional shares on regulated markets (exchanges and multilateral trading facilities (MTFs)) is characterized by strict rules and control mechanisms designed to ensure market integrity, investor protection, and financial stability. However, significant hurdles currently exist for admitting crypto shares to trading on regulated markets, particularly regarding compliance with eWpG and MiFID II requirements:

  • Obligation for Entry into Securities Settlement System (Art. 3 Para. 1 CSDR): Under EU law, entry into a securities settlement system is a prerequisite for tradability on regulated markets. Crypto shares currently don’t meet this requirement as their decentralized structure is incompatible with the centralized nature of securities settlement (Art. 3 Para. 1 CSDR). Securities dematerialization in settlement systems is based on registration in a central securities depository’s central register, whereas crypto shares rely on decentralized registers (blockchains).

  • Intermediation Requirement (Art. 53 Para. 3 MiFID II): Trading through intermediaries (e.g., investment firms, banks) is mandatory on regulated markets. This contradicts blockchain technology’s decentralized nature, which aims to eliminate intermediaries. However, the EU’s DLT Pilot Regulation enables approval of DLT-based trading venues that allow crypto share trading without traditional intermediaries’ involvement.

  • Separation of Trading and Post-Trading Activities (Recital 14 DLT Pilot Regulation): Regulated markets are subject to separation of trading and post-trading activities (clearing, settlement, custody). However, DLT technology enables combination of these activities, which is incompatible with existing regulatory requirements. This strict separation is shaped by historical development in securities trading, where settlement and custody primarily served risk management purposes with the beginning of securities trading. However, the EU’s DLT Pilot Regulation provides exceptions from this separation to enable trading in DLT-based financial instruments.

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Potential:

Despite these hurdles, trading crypto shares on regulated markets offers significant potential:

  • Increased Liquidity: Access to a broad investor base increases crypto shares’ liquidity.

  • Investor Protection: Strict regulation of exchanges and MTFs ensures a high degree of investor protection.

  • Market Integrity: Regulation prevents market manipulation and insider trading.

  • Trust: Trading on regulated markets increases investor confidence in crypto shares.

Perspectives: The EU’s DLT Pilot Regulation could partially overcome these hurdles in the future. It allows exceptions from existing regulatory requirements to test trading of DLT financial instruments on regulated markets.

Crypto Share Life CycleUnregulated Markets