Now, picture a world where accessing capital isn’t a privilege, but a right. A smallholder farmer in rural Kenya can be instantly approved for a microloan. They have the same access to federal funding as a tech entrepreneur in Silicon Valley. This is not merely some technocratic utopian dream. It’s the transformational capability that Distributed Ledger Technology (DLT) unleashes. ESMA’s pilot program is a very important, though imperfect, step toward making that potential a reality.

DLT: Leveling the Playing Field?

We all know the truth — the current financial system is rigged against many. It’s operating on a foundation of further intermediaries, all of their cumbersome fees, and an even more cumbersome process that consistently disenfranchises those most in need. Consider the millions of individuals who are unbanked and underbanked, and credit outcomes for the 30 million small businesses that have difficulty accessing credit. DLT, with its promise of decentralization and transparency, provides an opportunity to rethink this system.

ESMA's proposed amendments to the DLT Pilot Regime are a welcome sign that regulators are beginning to understand this potential. As anyone who’s ever been in the industry has told you, the current restrictions are just way too strict. A €6 billion issuance cap? A €500 million market capitalization limit? These aren't sandbox parameters; they're handcuffs. In doing so, they limit innovation and make it impossible for the pilot to fully prove out what DLT is capable of.

It's not just about removing restrictions. It’s about positively creating the conditions for DLT to flourish and, crucially, help meet a social need. How can DLT-based financial services better reach individuals and small businesses in low- and moderate-income communities with limited access to capital markets? Frankly, that’s the question we all ought to be asking.

Remittances, Microloans, Empowerment

Consider remittances. Every year to family or loved ones back home, sometimes through costly channels of formal money transfer intermediaries. DLT is an ideal tool for removing intermediaries on high-level transactions. This saves taxpayer dollars and helps put more money in the hands of their intended use. Now picture the millions of families in developing countries which depend on these remittances for putting food on the table each day. That's the power of DLT.

Microloans is another area where DLT can have an outsized impact. DLT offers a transparent, secure, and immutable ledger of transactions. This innovation enormously lowers the risks of lending to small businesses in developing countries. This, in turn, ultimately helps lower interest rates and improve access to capital.

  • Cross-border Remittances: Reducing fees, increasing speed.
  • Microloans: Lowering interest rates, expanding access.
  • Financial Transparency: Building trust, reducing corruption.

DLT is not a silver bullet. While there are limitations, it’s a tool that cut both ways as all tools do which means it can be used for good or for ill. As adoption of DLT grows, especially in developing countries, we need to be aware of and address the moral and reputational risks involved. Digital literacy is a major hurdle. Data privacy is a concern. Regulatory uncertainty can stifle innovation.

Navigating the Risks Responsibly

Consider, for example, a rural farmer in Ghana who has been swindled by a complicated DLT-based con. Or a poor neighborhood in India losing their private information as the result of an inadequately secured DLT platform. These are not just hypothetical future scenarios, these are tangible risks we must proactively plan for.

ESMA's emphasis on investor protection is crucial. Suitability tests, disclosures, and stringent security measures are all necessary to make sure that DLT-based financial services are not misused. It’s time we moved past just safeguarding investors. We need to empower communities with the knowledge and skills they need to navigate the DLT landscape safely and effectively.

What about the elephant in the room: stablecoins? ESMA is right to highlight the risks that come from the use of stablecoins or electronic money tokens for settlement. The collapse of the so-called stablecoin TerraUSD underscores this serious risk. It highlights the ways in which these ostensibly safe assets can destabilize the entire financial system. We can all agree that central bank money is the safest form of money, but it’s not necessarily the most pragmatic. There is no question that we have to find the balance between innovation and risk management. Maybe tiered thresholds, just like ESMA is recommending, are the solution.

The UK’s Digital Securities Sandbox takes a more dynamic approach. National authorities account for participant risk profiles by raising or lowering limits, producing a powerful innovation model. This adaptive approach would give regulators more leeway to fit their oversight to the unique risks and opportunities that each platform brings.

The road to true financial inclusion is long and fraught with challenges. DLT is not a magic wand, but it is a powerful tool that, if used responsibly, can help us create a more equitable and inclusive financial system. ESMA’s pilot program is an important testbed. Its success will depend on whether we can all be willing to learn from missteps, pursue unconventional approaches, and focus on uplifting our most underserved communities. So, let’s not just create a new DLT; let’s create a new and improved DLT–a DLT for everyone.