Tokenized bonds and shares in Italy

The Italian Council of Ministers has approved a legislative decree in recent days regarding tokenized bonds. More specifically, this legislation is designed to implement the provisions of EU Regulation 2022/858. It is part of a pilot regime for market infrastructure based on distributed ledger technology (DLT).

In fact, by 23 March 2023, EU countries were required to publish legislation making the Regulation applicable in national law. With this decree, the Italian government complies with the EU’s request.

The legislative decree about tokenized bonds

The decree regarding tokenized bonds introduces “urgent provisions on the issuance and circulation of certain financial instruments in digital form”. What’s more, the provisions will also lead to “the simplification of FinTech experimentation”.

In essence, digital finance is being regulated with regards to the use of blockchain for stocks and bonds. This regulation allows them to be issued in the form of tokenized bonds.

According to the decree, it introduces:

“measures to simplify the experimentation related to techno-finance activities (Fintech), referred to in Decree-Law No. 34 of April 30, 2019, by which a simplified and transitional regime (regulatory sandbox) was introduced into the legal system for the experimentation of digital technological innovation activities in the banking, financial and insurance sectors, in order to allow fintech operators to test innovative solutions from the digital point of view, with constant dialogue with supervisory authorities.”

The urgency of the decree regarding tokenized bonds is due to the impending deadline set at the EU level. It also aims to prevent Italian operators from being at a competitive disadvantage. This is when compared to other operators based in EU member states where these regulations have already been approved.

The pilot project and the regulatory sandbox

The pilot project and regulatory sandbox will allow market participants to test DLT in a controlled environment. Consequently, they will maintain the reliability of financial transactions, so that investors are protected.

Furthermore, Italian fintech companies will have the opportunity to test their products or services within this environment of tokenized bonds. They will also have the guarantee of being able to detect any non-compliance before launching them on the market. Thus, they will avoid the risk of suffering penalties later.

Which tokenized bonds will it apply to?

The EU Regulation provides for the issuance, trading and management of transactions in tokens that digitally represent certain securities.

Eligible for tokenization are shares, other participatory financial instruments and bonds issued by SpAs. Debt securities issued by LLCs and additional debt securities that can be issued under Italian law are eligible as well. Moreover, there are depository receipts relating to tokenized bonds and other debt securities of non-domiciled issuers from Italian issuers. Other examples include money market instruments governed by Italian law and shares or units of Italian collective investment schemes. Not only that, but additional instruments may be identified by Consob via special regulation.

The management of digital registers

The financial instruments covered by this Regulation about tokenized bonds will exist only as information in a digital register. This register will be maintained by a responsible person, central depository, bank, investment firm or financial intermediary. Furthermore, the digital register will have to ensure various things, for example, the integrity, authenticity and validity of the records. The records must evidence both the ownership and transfer of digital financial instruments.

Companies or organizations interested in serving as managers of digital registers can apply to Consob. Following this, Consob will evaluate their application based on various organizational and financial requirements. These are described in Article 20 of the decree about tokenized bonds. In addition, the competent authority may take measures to remove or suspend them from the list.

The person in charge of the register will be liable for any damage caused by their actions. Any damages will be owed to the person in whose favor the records were made or should have been made. This applies to loss arising from false or misleading information, but also to damage caused by the omission of information. A responsible party may prove, however, that they took proper precautions to ensure the accuracy and completeness of the information.

The decree regarding tokenized bonds provides for significant penalties for the person in charge of the digital register. Indeed, such penalties can be up to €5 million.

Supervisory authority

Consob and the Bank of Italy will monitor compliance with the obligations and requirements applicable to registered officers. Specifically, Consob will be responsible for transparency and proper management of the activities of registered officers and investor protection. On the other hand, the Bank of Italy will be responsible for ensuring stability and risk containment. This is limited to certain areas specified in Article 27 of the decree.

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