Podcast
Questions and Answers
What is a principle of the EU's regulatory approach to fintech?
What is a principle of the EU's regulatory approach to fintech?
Which of the following is NOT a key objective of the EU regulatory framework for digital finance?
Which of the following is NOT a key objective of the EU regulatory framework for digital finance?
What is a challenge associated with the concept of 'technological neutrality' in the EU regulatory framework?
What is a challenge associated with the concept of 'technological neutrality' in the EU regulatory framework?
Which regulation primarily addresses stablecoins and utility tokens within the EU's framework?
Which regulation primarily addresses stablecoins and utility tokens within the EU's framework?
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Regarding DLT and cybersecurity, what is a key concern mentioned in the EU regulatory framework?
Regarding DLT and cybersecurity, what is a key concern mentioned in the EU regulatory framework?
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What is the maximum market cap allowed for shares in admitted DLT securities?
What is the maximum market cap allowed for shares in admitted DLT securities?
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Which of the following entities is NOT covered under the Digital Operational Resilience for the financial sector (DORAR)?
Which of the following entities is NOT covered under the Digital Operational Resilience for the financial sector (DORAR)?
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Which aspect is NOT part of the ICT risk management requirements outlined in DORAR?
Which aspect is NOT part of the ICT risk management requirements outlined in DORAR?
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Which of the following definitions best describes 'ICT risk' as per the DORAR framework?
Which of the following definitions best describes 'ICT risk' as per the DORAR framework?
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What is the maximum size of DLT securities that can be recorded in a given DLT CSD?
What is the maximum size of DLT securities that can be recorded in a given DLT CSD?
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Which of the following requirements is included in the ICT third-party risk management of DORAR?
Which of the following requirements is included in the ICT third-party risk management of DORAR?
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According to the DLT framework, which type of security is explicitly excluded from being admitted?
According to the DLT framework, which type of security is explicitly excluded from being admitted?
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What aspect does the US 'Howey Test' primarily evaluate?
What aspect does the US 'Howey Test' primarily evaluate?
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Which type of digital financial asset (DFA) is not classified as DLT-based?
Which type of digital financial asset (DFA) is not classified as DLT-based?
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What distinguishes a native token from a non-native token in the context of cryptocurrencies?
What distinguishes a native token from a non-native token in the context of cryptocurrencies?
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Which of the following is an example of a utility token?
Which of the following is an example of a utility token?
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In the context of digital financial assets, which statement accurately describes Central Bank Digital Currency (CBDC)?
In the context of digital financial assets, which statement accurately describes Central Bank Digital Currency (CBDC)?
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What is a fundamental difference between centralized systems and decentralized systems in the context of blockchain technology?
What is a fundamental difference between centralized systems and decentralized systems in the context of blockchain technology?
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Which of the following digital financial asset types may involve use of smart contracts?
Which of the following digital financial asset types may involve use of smart contracts?
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Which of the following provides a right to a financial return as a digital financial asset?
Which of the following provides a right to a financial return as a digital financial asset?
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Which mechanism is crucial for maintaining consensus in decentralized blockchain systems?
Which mechanism is crucial for maintaining consensus in decentralized blockchain systems?
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What is a characteristic of asset-referenced tokens in the classification of digital financial assets?
What is a characteristic of asset-referenced tokens in the classification of digital financial assets?
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What type of functionality do utility tokens typically provide?
What type of functionality do utility tokens typically provide?
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What distinguishes a distributed ledger system from a centralized system?
What distinguishes a distributed ledger system from a centralized system?
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Which feature is NOT associated with distributed ledger technology (DLT)?
Which feature is NOT associated with distributed ledger technology (DLT)?
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Which term refers to the process of converting physical assets into digital tokens on a blockchain?
Which term refers to the process of converting physical assets into digital tokens on a blockchain?
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In terms of regulatory frameworks, how do the EU and US approaches to crypto asset regulation primarily differ?
In terms of regulatory frameworks, how do the EU and US approaches to crypto asset regulation primarily differ?
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What mechanism is commonly used in blockchain systems to achieve consensus on transaction validity?
What mechanism is commonly used in blockchain systems to achieve consensus on transaction validity?
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What is a significant advantage of using smart contracts within distributed ledger technology?
What is a significant advantage of using smart contracts within distributed ledger technology?
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Which of the following is true regarding the security of data in a decentralized system?
Which of the following is true regarding the security of data in a decentralized system?
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What role does cryptography play in the functionality of a blockchain?
What role does cryptography play in the functionality of a blockchain?
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What does the term 'trustless system' in blockchain technology imply?
What does the term 'trustless system' in blockchain technology imply?
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Which of the following best describes the permanence of transactions in a blockchain?
Which of the following best describes the permanence of transactions in a blockchain?
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Which of the following financial instruments is NOT classified as a money-market instrument?
Which of the following financial instruments is NOT classified as a money-market instrument?
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Which type of contract specifically relates to the transfer of credit risk?
Which type of contract specifically relates to the transfer of credit risk?
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Which of the following instruments is specifically designed to be settled in cash at the option of one party?
Which of the following instruments is specifically designed to be settled in cash at the option of one party?
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What is the key characteristic of derivative instruments that differentiate them from other financial contracts?
What is the key characteristic of derivative instruments that differentiate them from other financial contracts?
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Which of the following is a characteristic of options, futures, and swaps related to commodities?
Which of the following is a characteristic of options, futures, and swaps related to commodities?
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What distinguishes derivatives related to climatic variables and inflation rates from other instruments?
What distinguishes derivatives related to climatic variables and inflation rates from other instruments?
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Units recognized under Directive 2003/87/EC are classified as which type of instrument?
Units recognized under Directive 2003/87/EC are classified as which type of instrument?
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Which instruments are excluded from the definition of derivative contracts relating to commodities?
Which instruments are excluded from the definition of derivative contracts relating to commodities?
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In assessment of the legal nature of tokens, what approach is generally taken?
In assessment of the legal nature of tokens, what approach is generally taken?
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What is a critical aspect of the rights associated with tokens in investment?
What is a critical aspect of the rights associated with tokens in investment?
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Study Notes
DLT Securities Settlement System
- A CSD (Central Securities Depository) can operate a DLT-based securities settlement system.
- Transactions in DLT transferable securities are settled against payment (DvP).
- There are limits on the size of admitted DLT securities:
- Shares: < €200 million market cap
- Bonds: < €500 million market cap
- Sovereign bonds are not allowed.
- The total value of DLT securities recorded in a given DLT CSD cannot exceed €2.5 billion daily.
- Regulation 596/2014 (MAR) applies to this system.
Digital Operational Resilience for the Financial Sector (DORAR)
- DORAR applies to all regulated entities in the financial sector that use ICT risk management tools.
- Regulated entities include:
- Credit institutions
- Insurance intermediaries
- Payment institutions
- Reinsurance intermediaries
- Electronic money institutions
- Investment firms
- Crypto-asset service providers
- Institutions for occupational retirement pensions
- Central securities depositories
- Central counterparties
- Trading venues
- Trade repositories
- Managers of alternative investment funds and management companies
- Data reporting service providers
- Insurance and reinsurance undertakings
- Credit rating agencies
- Statutory auditors and audit firms
- Administrators of critical benchmarks
- Crowdfunding service providers
- Securitisation repositories
- ICT third-party service providers
DORAR Key Definitions and Clusters of Requirements
- DORAR aims to "build, assure and review […] operational integrity from a technological perspective".
- "ICT risk" encompasses "malfunction, capacity overrun, failure, disruption, impairment, misuse, loss or other type of malicious or non-malicious event" that can compromise network and information system security.
- DORAR outlines requirements for:
- ICT risk management
- ICT-related incident reporting
- Digital operational resilience testing
- ICT third-party risk
- Information sharing
- Competent authorities
The US Approach: the 'Howey Test'
- The "Howey Test" is used in the US to define a "security".
Digital Financial Assets (DFAs)
- DFAs are digital representations of value, stored on a computer or the internet.
- They may or may not have legal tender status.
- DFAs can be used as a means of exchange or for investment purposes, offering financial returns.
Non-DLT Based DFAs
- E-money
- Dematerialized securities
- Other (digital fiat money, like non-DLT CDBC)
DLT-Based DFAs
- Cryptocurrencies (Native tokens - Bitcoin, Ether, etc.)
- Fork native tokens (Bitcoin Cash, Ethereum Classic, etc.)
- Non-native tokens (on smart contract platforms - ERC20, BEP20, TRC20, etc.)
- Securities tokens (some stablecoins or DeFi tokens)
- Tokenized securities
- Other crypto assets (not qualifying as ‘security’)
- Asset-referenced tokens
- E-money tokens
- Utility tokens
- Central Bank Digital Currency (CBDC; permissioned)
The Emerging Regulatory Framework for DLT-Based Finance: EU vs US
- The EU has a regulatory framework for crypto assets, DLT infrastructure, and cybersecurity.
Key Features of the EU Framework for Crypto Assets
- Focus on technology-neutral, proportional, and integrity-enhancing regulations.
- Objectives:
- Fostering access to financial services
- Reducing operational costs
- Increasing market competitiveness
- Balancing data sharing with data protection
Limits of 'Technological Neutrality' (EU Regulation)
- Decentralized infrastructures can make it harder to identify responsible individuals or entities.
- Cybersecurity is crucial to address infrastructural challenges.
- Open access to data (open banking) is needed to overcome competitive concerns.
Digital Finance Action Plan (DFAP) - September 2020 (EU)
- Regulation on Markets in Crypto-Assets (MiCAR)
- Regulation on a pilot regime for market infrastructures based on DLT
- Regulation on digital operational resilience for the financial sector (DORA).
The EU Regulatory Approach: Key Principles
- EU regulatory approach: 'Keep calm and carry on!'
- Technology-neutral, proportional, and integrity-enhancing regulations.
- EU regulatory objectives:
- Fostering access to financial services for citizens and businesses
- Bringing down operational costs and increasing efficiency
- Making the Single Market more competitive
- Balancing data sharing and transparency with data protection
Key Definitions for Assessing Tokens' Legal Nature (Money or Money-Like)
- Money-Market Instruments
- Units in Collective Investment Undertakings
- Options, Futures, Swaps, Derivative Contracts (securities, currencies, interest rates, commodities, credit risk, etc.)
- Emission Allowances
What is Distributed-Ledger Technology (DLT) or the Blockchain?
- DLT is a distributed database of records, or public ledger of transactions, shared among participants.
- Each transaction is verified by consensus of a majority of participants.
- Information on the blockchain is immutable.
- In a nutshell, Blockchain can be seen as a way to verify and store agreements, processes, tasks, and payments digitally.
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Description
This quiz explores the principles of DLT-based securities settlement systems and the regulations surrounding them, including the market cap limitations for different types of DLT securities. Additionally, it covers the Digital Operational Resilience for the Financial Sector (DORAR) and its implications for regulated entities in the financial industry. Test your knowledge on these important financial topics.