Europe has been promising that tokenised assets will settle in the same instant, on the same rails, with nothing left hanging. The European Central Bank is working on settling distributed ledger transactions in central bank money, and the EU’s DLT Pilot Regime exists specifically to let DLT market infrastructures operate. Most of the tokenised settlement activity that gets announced, though, is still at the pilot or proof-of-concept stage.
Sebastien Dessimoz is co-founder and managing partner of Taurus, a digital asset infrastructure firm founded in Geneva in 2018 that provides custody, tokenisation and settlement technology to more than 40 banks and financial institutions, including Deutsche Bank, State Street and CACEIS. He answered six written questions from The Fintech Times on why atomic settlement is harder than the marketing suggests, where the split in the European rulebook comes from, and what would have to change for same-instant settlement to become routine.
Dessimoz thinks the difficulty is often underestimated. Atomic settlement means the asset and the cash change hands at the same instant, with legal finality, so neither side is left exposed, and most descriptions stop at the idea that it happens on one ledger. “The harder truth is that a real trade has two legs, a securities leg and a cash leg, and both have to be genuinely on-chain, legally final, and able to move together as a single transaction.”
For that to work, several things have to line up at once. The security has to exist as a tokenised instrument whose on-chain record is the legal record of ownership rather than a copy of an off-chain register. There has to be a form of tokenised cash that can settle against it with finality. Both have to sit on infrastructure that can execute the two movements as one indivisible transaction, even when they touch different systems, and the parties involved have to be authorised to handle each leg. “Tokenising the security is the straightforward half. The cash leg and the legal finality are where projects get stuck.”
Two or three rulebooks for one trade
In Europe the split is built into the regulation. A tokenised security is a financial instrument, so it falls under MiFID II and the surrounding securities rules. The cash leg falls elsewhere depending on its form: a regulated stablecoin is an e-money token under MiCA, a tokenised deposit sits under banking law, and wholesale central bank money sits with the central bank. “So a single trade can straddle two or three different rulebooks, each with its own supervisor.”
To settle the whole trade a firm needs authorisation on each leg it touches. On the securities side that means MiFID investment-firm permissions and, if the firm wants to operate the trading or settlement infrastructure itself, access to the DLT Pilot Regime. On the cash side it needs whatever the chosen cash form requires: an e-money or MiCA authorisation for a stablecoin, a banking licence for tokenised deposits, or access to central bank settlement. “The point most people miss is that these are separate authorisations under separate regimes. Holding one does not give you the other.”
The practical consequence is that almost no single firm can settle both legs itself, so most projects are assembled from several parties, each authorised for its own piece. That is workable in a controlled pilot, he said, but hard to turn into routine production, because every additional party adds legal, operational and interoperability complexity to something that is supposed to be instantaneous. “The constraint is not moving the token. It is connecting authorised securities settlement to authorised cash settlement in a way that is legally final and repeatable.” A minority of projects clear that bar and reach live, limited production. Most remain demonstrations of what could work once the cash leg and the authorisations are solved.
Three workarounds, one shared cost
Firms bridge the gap in a few common ways, and each buys progress at a cost. The most common is to settle the securities leg on-chain while keeping the cash leg on traditional payment rails. It is easy to stand up, “but it breaks atomicity: the two legs no longer move together, so you reintroduce the settlement risk and the timing gap that on-chain settlement was meant to remove.”
A second is to use a stablecoin as the cash leg without full settlement finality in central bank money. That keeps both legs on-chain but substitutes the credit and redemption risk of the issuer for the finality of central bank money, which regulated institutions are cautious about for large-value settlement. A third is to run the whole thing inside a single operator’s closed environment, which makes atomic settlement look easy in a demonstration but does not scale across counterparties or connect to the wider market. “The shared cost across all of them is fragmentation: parallel rails, extra reconciliation, additional legal agreements, and a settlement that is only as final as its weakest leg.”
Which cash leg
The choice of cash leg changes the problem, because each form answers to a different regime and offers a different quality of settlement. A regulated stablecoin, as an e-money token under MiCA, is available today and can move on-chain, but it settles in commercial issuer money rather than central bank money, so it carries issuer and redemption risk and is not final in the way institutions want for large trades. A tokenised deposit settles in commercial bank money and fits naturally with how banks already operate, but its hard problem is interoperability: a deposit token from one bank has to be accepted and settled against another bank’s, which is the cross-institution exposure question the large bank consortia are now trying to solve. Wholesale central bank money is the end-state for finality, because it is the settlement asset with no credit risk, but it depends on central banks making on-chain settlement available, which is the purpose of the ECB’s work on settling DLT transactions in central bank money.
“So no single route solves the authorisation problem cleanly today. Central bank money is closest to true finality but depends on the central bank. Tokenised deposits are furthest along commercially but face interoperability. Stablecoins are the most available now but the least final. The realistic near-term answer is a mix, matched to the size and risk of the trade.”
Three to five years, for some instruments
Two things need to change, one regulatory and one in market infrastructure, and in his view they reinforce each other. On regulation, the securities leg and the cash leg need a clearer path to be settled together under authorisations that recognise each other, rather than as two separate regulated activities a firm has to assemble. Making the DLT Pilot Regime permanent and lifting its volume caps would help, as would a supervised route to settle in tokenised central bank money. On infrastructure, the market needs digital-ready central securities depositories, a neutral and final settlement asset that works across institutions, and interoperability standards so that tokenised cash and tokenised securities can move across different systems as one transaction. “Central bank money settlement is the piece that unlocks the rest, because it removes the finality question the workarounds are all trying to answer.”
On timing, he would be wary of anyone promising it next year. “For specific, high-value instruments settling in a controlled way, routine same-instant settlement is a three to five year horizon in Europe, paced by the DLT Pilot Regime and the central banks’ wholesale settlement work.” For the broad market, including listed equities, it is longer, closer to five to ten years, because that means rewiring settlement infrastructure that already works. The direction, he said, is not in doubt, and he is encouraged that both legs are developing at the same time rather than one waiting for the other. “The pace will be set by the cash leg and the authorisations rather than by the tokens, and I expect it to come step by step.”
Taurus holds an EU MiFID II investment-firm licence. The DLT Pilot Regime, which the European Commission is reviewing, currently caps the volumes a DLT market infrastructure can handle, which is the limit Dessimoz would like lifted.
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