The European Blockchain Regulatory Sandbox is helping regulators to understand the benefits of blockchain in financial services domain:
The European Commission had launched a regulatory sandbox to develop innovative use cases in Distributed Ledger Technologies (DLT). The sandbox, named European Blockchain Regulatory Sandbox, was created jointly by the European Blockchain Services Infrastructure (EBSI), set up in 2018 when 29 countries (all EU members states, Norway and Liechtenstein) and the European Commission. It is intended as a pan-European framework for regulatory dialogues to create legal framework for blockchain solutions. Started in 2023 and expected to be completed by 2026, it is funded by the Digital Europe Program. What is noteworthy is that it is based on SME strategy and supports 20 projects annually. It is being facilitated by a consortium under the leadership of legal firm Bird & Bird and its consulting arm OXYGY. Participants are expected to exchange non-personal data to develop algorithms for use in asset management, insurance, transportation, energy and manufacturing sectors. Some of the pilots have shown excellent result in the use of DLT across industry sectors.
DIALOGUE, BEST PRACTICES
The key objectives of the sandbox are:
- facilitate confidential discussions between blockchain innovators and regulators;
- provide specialized legal and regulatory guidance;
- develop best practices for blockchain adoption across different industries;
- strengthen cross-border collaboration within the EU’s regulatory landscape.
The sandbox allows 20 selected projects per cohort to engage with both national and EU regulators to discuss regulatory challenges, potential compliance pathways and innovative applications of blockchain technology. There are 3 cohorts. While the first one is now complete, the second in proceeding. The third one is in the process of being finalized.
A major aim of the sandbox is to initiate a cross-border dialogue between regulators and financial services supervisors on the one hand, and public authorities and corporates on the other. Use case developers are expected to present their versions and receive legal guidance from regulators. The collaborating legal firm Bird & Bird provides an interface between developers and regulators. The sandbox also interacts with similar regulatory sandbox frameworks in other regulatory domains, especially the EU Digital Finance Platform and the Artificial Intelligence Sandboxes.
SOME IN FINAL STAGES
Corporates from all industry sectors and public entities are participating in the sandbox and some of the projects undertaken have developed beyond the proof-of-concept stage and awaiting becoming operational. The selection of use cases is being done by the sandbox facilitator based on criteria agreed with the European Commission. The facilitator is being supported by an independent academic panel of experts for the selection of use cases.
The first cohort included a variety of blockchain projects covering different sectors and regulatory areas, allowing for comprehensive exploration of potential issues. Each selected use case was paired with the most relevant regulator(s) to facilitate targeted discussions on specific regulatory concerns. A key aim was to gather insights from the discussions and create a set of best practices for future blockchain projects in Europe. The areas covered included verifiable credentials/authentication, CO2 emissions, digital product passports, cultural asset passports, customs, cyber security, data sharing and DAOs.
For the second cohort, 20 innovative blockchain projects were selected from some 60 applicants and these ranged from tokenization of assets to enhancing digital identity verification and improving logistics and supply chain management.
For a difference, more regulators from various EU countries are participating in the cohort, indicating a growing interest in understanding and supporting blockchain innovation. Some of the projects in the cohort are tackling practical use cases like tokenized real estate, enabling fractional ownership of real estate assets through blockchain-based tokens, managing and verifying digital identities securely and enhancing transparency and traceability in supply chains. The cohort, which began in September 2024 would end in mid-2025.
The sandbox is currently open for applications for its third and final cohort. Projects that are being selected are supply chain management, digital identity verification, decentralized finance (DeFi), healthcare data sharing, voting systems, carbon credit tracking, asset tokenization and smart contracts for legal agreements. Possible specific use cases could include cross-border payments using stablecoins, decentralized clinical trials, traceability in food supply chains, green bond issuance and digital identity verification for government services.
MAJOR OUTCOMES
Some of the key outcomes of the sandbox so far are:
- facilitating regulatory dialogue between innovators and regulators across the EU;
- enabling testing of blockchain applications in a controlled environment;
- providing legal clarity for emerging blockchain use cases;
- enhancing regulators’ understanding of blockchain technology; and
- fostering a network for blockchain innovators to share knowledge and best practices.
The sandbox has been able to bring together national and EU regulators with blockchain developers to discuss potential legal and regulatory issues in a confidential space. It also enabled corporates to gain insights into how existing laws might apply to their blockchain projects by interacting with regulators directly.
For regulators, the sandbox helped to have an idea about dream world of blockchain technologies and best practices from other jurisdictions.
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