Settle Me This: Europe’s Tokenization Experiments as Building Blocks for a Digital Capital Markets Union?

This article is a reflection on the ECB DLT trials and the DLT Pilot regime. I have some thoughts on them, in part, because my students keep on asking me whether blockchain has already revolutionized finance (no, not yet!) and, in part, because they might tell us something about the possible trajectory of the evolution of the Capital Markets Union (CMU) project.

TL:DR is that platform interlinking is likely to be the key mechanism for the development of new securities markets infrastructures and settlement will likely continue to occur in central bank money. ?

Why is there no Uber for securities settlement?

One of the issues that got me, as a former capital markets lawyer, interested in FinTech was my experienced with the settlement of securities offerings. For those blissfully unfamiliar, settlement in the context of primary offerings is that glorious moment when newly issued securities—stocks, bonds—are finally distributed to investors, or more precisely, to a central securities depository (CSD) institution, which holds the securities on their behalf, and the issuer gets its hands on the proceeds. I mostly worked on US offerings so in my experience, this was the Depositary Trust Corporation (DTC), which also operates in Europe along around numerous other CSDs. Sounds simple enough, right? But before we get to that magical exchange, there’s a small matter to deal with: paperwork. This is not the sleek digital workflow you might envision when thinking about modern finance. No, the documents don’t just float effortlessly through the cloud to DTC in a frictionless, tech-enabled process. Instead, enter the junior lawyers, who must assemble actual physical documents—yes, printed on paper, with ink. And I don’t mean the polite, corporate-acceptable “e-signature” kind of ink. I mean wet ink. As in, pens, hands, signatures. Once that’s done, sure, someone might scan and email the documents, but even then, in many cases, you’ll still find someone picking up the phone to call DTC and confirm receipt.

Why is it like this? Excellent question. The short answer, to my mind anyways: inertia. The system technically works, so there’s little incentive to change it. And if you’re DTC, well, it’s not as if you’re facing fierce competition. There isn’t exactly a Silicon Valley darling offering an “Uber for securities settlement” that’s threatening to disrupt your monopoly. Then there’s the lawyers who are wired to love precedent. And this process, archaic as it may be, has decades of precedent behind it. So why rock the boat?

Still, the inefficiency of it all is truly something to behold.

There’s a kind of absurd beauty in watching junior associates, armed with law degrees and caffeine habits, act as glorified document couriers in what should, by all rights, be a streamlined, automated process. It’s like watching an air traffic control tower operate entirely via Post-it notes—sure, it might get the job done, but you can’t help wondering if there’s a better way to do things that doesn’t involve such a comically outdated system.

Could this way involve, yes, you guessed it, tokenization? I’m sure by know everybody knows what that refers but, in the unlikely event that is not the case, tokenization refers to the process of converting ownership rights or claims to an asset into a digital token issued using… yes…distributed ledger technology (DLT) or blockchain. I have been and continue to be very skeptical about the potential of blockchain to improve settlement in financial markets. How not to be?! Blockchain enthusiasts have been talking about this for more than a decade now and we have not really seen much progress. But it will not go away. Last week, Bloomberg run an article under the title Tokenization Has Become Wall Street’s Latest Buzzword. Some people quoted in the article expect Trump’s presidency is likely to reenergize the efforts.

Enter the EU, which has become the unlikley fronterunner in this area, launching two separate tokenization initiatives: the ECB’s DLT trial and the EU’s DLT Pilot Regime.

On the surface, this looks like one of those classic European attempts to tackle a complex issue with lots of bureaucracy. But maybe, just maybe, it’s something more. Because if you squint hard enough, all this tokenization chatter starts to sound like a bid to jump-start the CMU —a decades-long dream to transform Europe’s patchwork of financial systems into a seamless single market. A recently published report requested by the European Parliament’s Committee on Economic and Monetary Affairs, published in March this year concluded that CMU had ‘disappointed in its first decade.’ But now, with tokenization and DLT in play, the CMU is getting a digital twist.

This brings us to Piero Cipollone, a member of the ECB’s Executive Board, who has emerged as the leading ECB spokesperson for payments-related matter. Towards the end of last year, he gave a series of speeches on the promise of a Digital CMU, in which he argued that tokenization could be key to achieving a truly unified European capital market. The idea is that by digitizing financial instruments—bonds, equities, you name it—and using DLT for settlement, Europe could finally create a cohesive, cross-border market where capital flows seamlessly across the continent.

That’s the dream, anyway. Let’s break it down.

Why Tokenization Matters for the CMU

The CMU has always been about one thing: breaking down barriers. Lots of barriers. Legal barriers, regulatory barriers, structural barriers—you name it, Europe has it. The legal barriers? Those stem from the delightful patchwork of national insolvency laws, collateral rules, and contract enforcement quirks that vary wildly across member states. Regulatory barriers? That’s when EU-wide financial regulations, which are supposed to be consistent, get applied in wildly different ways by national authorities. And structural barriers? Think fragmented infrastructure and a market where national CSDs and clearinghouses barely talk to each other, let alone work together. The result? A system that makes it harder for firms to raise capital and limits investment opportunities. Not exactly a recipe for economic dynamism.

And if you’re wondering just how fragmented things are, here’s a fun fact: the EU boasts 35 exchanges for listings and 41 for trading. Most of them are struggling to attract both listings and investors, so it’s less of a vibrant financial ecosystem and more of a collection of small ponds with a few confused fish swimming around. Oh, and let’s not forget the 40 CCPs and CSDs operating across the continent—because why have one efficient clearing and settlement system when you can have dozens of disconnected ones?

To really drive the point home, researchers at New Financial, a think tank, recently tried to fit the entire structure of European equity markets onto a single page. After 23 attempts, they finally managed it. Which, if nothing else, is an excellent metaphor for the state of capital markets in Europe: theoretically possible, but only after an exhausting amount of trial and error.

Tokenization, according to Cipollone, offers a new way to address those barriers.

Instead of trying to harmonize a patchwork of existing financial infrastructures, Europe could leapfrog straight into the future by creating a unified digital capital market.

Imagine a world where a French company can issue tokenized bonds on a distributed ledger that are instantly tradable and settleable across all EU countries without the usual headaches of cross-border settlement. No more dealing with 27 different systems, no more delays, and lower costs for everyone involved. That’s the promise of tokenization for the CMU.

The ECB’s Tokenization Experiment: A Strategic First Step?

This is where the ECB’s wholesale DLT trial comes in—the grand experiment to see whether tokenization can do more than just generate headlines. Launched in the spring of 2023, the project invited financial market players to roll up their sleeves and play around with DLT. And they showed up: 60 financial firms and four central banks signed on.

The first trial wrapped up in May 2024 and involved tokenizing government bonds and simulating delivery-versus-payment settlement using central bank money. Then, in the summer of 2024, they upped the ante: an additional 49 financial firms and three more central banks joined for round two. This time, the trials expanded to include domestic euro payments, a broader range of securities transactions, and even foreign exchange payment-versus-payment deals involving other central banks—though everything was still firmly in the “mock settlement” category. Between May and November 2024, they managed to process over 200 transactions with a total notional value of €1.59 billion. So, yes, it’s all very serious, even if the money wasn’t exactly real. (As my former lawyer colleague used to say, “the money is only real when it hits your back account.”)

Now comes the fun part: reflecting on what they learned. This month, the ECB will gather everyone around the proverbial conference table to discuss the trials and their outcomes. The lessons from this exploratory work will help the Eurosystem decide whether to take the next step toward a blockchain-based future or, well, file it away under “interesting but not quite ready.”

My view is that the ECB trial was a significant exercise in figuring out how tokenization might actually function in a future Digital CMU. The standout feature? Settlement was carried out using central bank money, which meant the DLT infrastructure was directly linked to the ECB’s own plumbing—specifically, the TARGET service. That’s an interesting choice because, as Noelle Acheson noted, it neatly sidesteps one of the core value propositions of tokenization: having both money and assets on the same ledger. You know, the whole point of this tech revolution.

But it’s easy to see why the ECB took this route. As the custodian of the euro, the ECB is understandably keen on maintaining its grip on settlement. The last thing it wants is some shiny new blockchain bypassing its well-oiled euro machinery and turning settlement into the Wild West of distributed ledgers. So, instead of fully embracing the disruptive potential of tokenization, the ECB appears more interested in a hybrid approach—keeping control over settlement while cautiously exploring the tech.

Given this, it’s safe to assume that much of the ECB’s future policy and research will revolve around figuring out how to better interlink trading platforms with its own infrastructure. Expect more experiments, more interconnectivity projects, and plenty of carefully managed innovation. Because if there’s one thing the ECB wants, it’s to stay in the driver’s seat while dabbling in the future. As it should.

The EU DLT Pilot: A Failure?

Now, the interesting question is: which platforms are actually going to power this brave new Digital CMU? That’s where the EU DLT Pilot Regime comes into play. Launched in March 2023, the regime temporarily loosens securities rules, giving firms a sandbox to experiment with tokenized financial products and, theoretically, figure out what a fully digital capital market might look like. The idea is to foster innovation by creating new categories of market infrastructure, like the DLT Multilateral Trading Facility and the DLT Settlement System.

Sounds promising, right? Well, until recently, the participation rate was a resounding zero. But in the past few months, two brave souls signed up. First, there’s CSD Prague, the Czech central securities depository, which plans to test a distributed ledger settlement system using R3’s Corda blockchain. Their goal? To broaden the range of entities that can directly participate in settlement—something that would be genuinely new. Then there’s 21x, a German startup with plans to launch an exchange and settlement system on Polygon, registering trades on-chain without needing a traditional CSD. That’s right, they’re going full blockchain-native.

But before you get too excited, there are a couple of big caveats. As the Association for Financial Markets in Europe, a lobbying group for the financial industry, pointed out, the regime imposes strict volume caps, making it a lot less appealing for large institutions. And then there’s the catch: at the end of the trial period, firms are required to migrate any services back to the traditional financial rails. In other words, after putting in all that effort, participants might find themselves saying, “Thanks for playing, now go back to the old way of doing things.”

With those constraints in mind, it’s hard to imagine a revolutionary new platform emerging from the Pilot Regime. Sure, the regime might get extended, and the rules might get tweaked, but as things stand, there’s little incentive for major players to dive in. More likely, any viable platform will require a public-private partnership—something more structured, perhaps resembling the setup used in the ECB’s DLT trial. Because while the EU might be open to experimentation, it’s unlikely to hand over the keys to its financial markets without maintaining some serious oversight.

Final Thoughts: Early Days, Big Ambitions

In the end, Europe’s push toward tokenization and a Digital CMU feels more like an evolutionary process than a revolutionary one. The ECB’s trials and the EU’s DLT Pilot Regime signal genuine interest in modernizing financial infrastructure, but progress will be slow, measured, and tightly controlled. While it’s unlikely that a bold, new platform will emerge purely from private sector experimentation, a carefully managed public-private partnership could chart the path forward. Whether this effort leads to a more integrated, efficient capital market or simply another chapter in Europe’s long history of cautious innovation remains to be seen. But one thing is clear: Europe’s digital finance ambitions are no longer just theoretical—they’re being tested, one experiment at a time.