Significant legislative milestones have been reached at a national level regarding digital financial instruments since our last article ‘Law Decree implementing the DLT Pilot regime in Italy - Major change to Italian sandbox’, which explored the regulatory framework within the context of EU Regulation 2022/858 (the “DLT Pilot Regulation”) and Italian Law Decree No. 25 of 17 March 2023 (the “Decree”).

The Decree was introduced to address the challenges and opportunities presented by digital financial instruments on the back of the DLT Pilot Regulation and was officially converted into Law No. 52 on 10 May 2023.

Subsequently, and as envisaged under Article 28 of the Decree, on 6 December 2023 the Italian Securities and Exchange Commission (“Consob”) published its Regulation on the Issuance and Circulation of Financial Instruments in Digital Form (the “Consob Regulation”).

The Consob Regulation sets out a comprehensive framework governing the establishment and operation of registers utilising distributed ledger technology (“DLT”). Of particular significance are the provisions regarding enrolment in the list of entities responsible for managing DLT registers (“DLT Managers”), setting out the requirements and procedures specified by Consob.

Identity and responsibilities of a DLT Manager

The list of entities that potentially qualify as DLT Managers is set out under Article 19 of the Decree and Article 5 of the Consob Regulation; this includes, amongst others, issuers based in Italy, banks, investment firms, financial intermediaries registered pursuant to Article 106 of the Consolidated Banking Act and market operators based in Italy.

Pursuant to Article 23 of the Decree, DLT Managers are required to act ‘transparently, diligently and fairly’. In addition, they have to adopt appropriate measures to, for example, prevent the use of digital financial instruments by unauthorised parties, and ensure that the total number of digital financial instruments constituting a single issuance is unalterable.

Procedure for enrolment as a DLT Manager

The prerequisites for admission as a DLT Manager are set out under Article 20 of the Decree and Article 8 of the Consob Regulation. Applications must be made in accordance with Annex 1 of the Consob Regulation. Applicants are obliged to furnish a technical dossier meeting the criteria outlined under Annex 2 of the Consob Regulation.

Following receipt of an application, Consob has 20 working days to ascertain the completeness of the information received and may request any missing documentation within this timeframe. The documentation so requested must be supplied within 30 working days, failing which the application may be rejected.

In addition,  Consob can engage an independent auditor to verify an applicant’s compliance with legal requirements. Criteria for auditor selection include professionalism, experience, independence and fiscal prudence.

Without prejudice to Consob’s powers to temporarily suspend its examination of any application, under Article 8(8) of the Consob Regulation, Consob has 90 days to either accept or reject each application, issuing a definitive decision and notifying the applicant accordingly.

With regard to applications to serve as DLT Manager by banks and investment firms in respect of digital financial instruments issued by third-party issuers outside of their group, Consob will consult with the Bank of Italy and may suspend the application during such consultation for the maximum period permitted by the Decree.

Technical Report

As mentioned above, under Article 8 of the Consob Regulation, applications must be submitted with a technical dossier meeting, at a minimum, the specifications contained in Annex 2 of the Consob Regulation.

In addition to furnishing an overview of eligible financial instrument categories for registration in the DLT register and the services envisaged to be offered, the Consob Regulation stipulates that details pertaining to the technological infrastructure must demonstrate the applicant’s comprehensive understanding of the same, and should be articulated in clear and intelligible language. In summary this should include, inter alia:

• a comprehensive description of the proposed technological infrastructure, delineating the functions executed by distributed ledger technology-based components and any off-chain operations;
• the operational regulations and permission attribution methodologies governing primary DLT functions, including any delineation of permissionless, permissioned or hybrid attributes, and user identification techniques;
• a description of the support infrastructure that will be provided; and
• the operational models accessible to investors to monitor the relevant financial instruments.

Conclusion

The Consob Regulation is set to play a pivotal role in the realm of digital financial instruments in Italy, representing the latest step in the regulatory efforts aimed at establishing a framework for the operation of Italian digital financial instruments.

Together with the Decree, and complemented by concerted efforts at European Union level, it is poised to catalyse the expansion of the digital financial instruments market which, while still in its nascent stages, holds great potential for growth and innovation, in Italy and beyond.

Authored by Franco Lambiase, Madeleine Horrocks and Salvatore Graziadei.