EU Launches Blockchain Regulatory Sandbox for DLT Development

The European Commission (EC), a cabinet government and the executive body of the European Union (EU), has announced the launch of its newest regulatory sandbox for blockchain and distributed ledger technology (DLT).

The European Blockchain Regulatory Sandbox

The newly established European Blockchain Regulatory Sandbox was launched to create a pan-European regulatory framework to promote legal certainty for projects using blockchain technology. It is facilitated by a consortium including Bird & Bird, OXYGY, WBNoDE and Spindox.

Funding for creating the sandbox was raised from the Digital Europe Programme. The initiative is expected to work for the SME over the next three years and, according to its concept, will support up to 20 projects from both the private and public sectors within the European Blockchain Services Infrastructure. Independent academic experts will oversee the whole process.

"Projects will be selected through calls for expression of interest. Every year, the most innovative regulator participating in the sandbox will also be awarded a prize," the EC stated in the press release.

Europe Sees Blockchain Potential

According to the EC, DLT and blockchain have broad potential, which is not only limited to the financial industry. The technology can support regulation and documentation in the fight against fraud.

"Companies can facilitate the exchange of non-personal data to train algorithms, and/or create unique digital twins for assets they buy, sell or insure in the mobility, energy and manufacturing sectors," the EC added.

While pilot programs conducted in the EU have shown the considerable potential of blockchain, the EC points to legal uncertainty. The regulatory sandbox has been created to lower the uncertainty, where regulators and supervisors can have an open dialogue and companies and public institutions can develop.

"The Sandbox is open to companies from all industry sectors and public entities for projects beyond a proof-of-concept stage and already close-to-market or at an early stage of being operational, involving amongst other technologies the use of DLT," the statement explained.

Initial applications are being accepted until 14 April 2023.

Watch the recent FMLS22 Executive Interview with Tobias Bauer from Blockchain Founders Fund.

Markets in Crypto-Assets Regulation

The European Union has been working since the middle of last year to regulate the cryptocurrency industry under the Markets in Crypto-Assets regulation (MiCA) proposal. MiCA seeks to regulate issuers of stablecoins and other unbacked crypto-assets such as Bitcoin. It also wants to bring operators of crypto-asset trading venues and wallets within its ambit.

Initial discussions on the MiCA started in September 2020. However, an interim legislative agreement between the EU and EC was reached just at the end of June last year. The MiCA is intended to be part of a broader digital finance package and does not cover all issues related to the cryptocurrency market: it bypasses the DeFi and NFT markets, for example.

The EU has started to take a stronger interest in blockchain technology at a time when it has declined significantly in the private sector. Venture capitalists are no longer as interested in funding the industry and only supported it with $2.3 billion in the last quarter. In the first half of 2022, funding was $30 billion, while in the second half, the amount raised came in at $7 billion, showing a definite reversal in the industry.