Digital Finance Strategy, Markets in Crypto Assets Regulation and More

The financial services and financial technology firms, particularly those dealing with payments and crypto-assets are welcoming the European Commission‘s Proposal for a Comprehensive Legislative Package for Crypto-assets in the EU and Retail Payments Strategy, revealed as part of the European Digital Finance Strategy.

The Payments department at SALVUS working side-by-side with our in-house blockchain specialists have analysed the Commissions’ intentions and provide a brief recap for our clients and partners in this article.

Definitely, the most noteworthy of the items discussed is the crypto-assets package. It comprises of the two (out of the three) legislative proposals that the European Union (EU) is adopting as part of its Digital Finance Strategy. These are legislative proposals for:

• Regulation on Markets in Crypto Assets (MiCA), which will create a pan-European regulatory regime for crypto-assets and related services, and
• A pilot regime for market infrastructures based on distributed-ledger technologies, aiming to create a safe space for testing innovative market infrastructures in the EU.

The European Digital Finance Strategy

Europe is host to many fintech start-ups and many other businesses that are overhauling their own models. These models of business and technology evolve in the digital direction and space, and European consumers are increasingly using digital financial services. At the same time, these developments change the nature of risks to consumers and financial stability, these developments have helped citizens and businesses tackle the unprecedented coronavirus pandemic crisis.

Based on this, the European Commission believes digital technologies are key for the European economy to compete, grow and serve across different industries. The Digital Finance Strategy aims to move Europe forward in that direction, with sound regulation of the perceived risks, and to enable European businesses to participate globally as leading digital players.

• The main goals of the Digital Finance Strategy

The strategy covers four areas:

Tackling fragmentation in the Digital Single Market for financial services: fewer obstacles, through a legal framework that enables the use of interoperable digital identity solutions, to cross-border operations would enable Europeans to enjoy more cost-effective products and services, and would help European financial firms scale up.

Ensuring that the EU’s regulatory framework facilitates digital innovation in the interest of consumers and market efficiency: the Commission takes a pro-active approach and proposes adjustments to the EU’s financial services legislation and supervisory practices, including legislative initiatives on crypto-assets, to ensure that they remain relevant in the digital age.

Creating a European financial data space to promote data-driven innovation, building on the European Data Strategy: while compliance with data protection rules, in particular the General Data Protection Regulation (GDPR) is a pre-requisite for financial services and products driven by data, enhanced data access and data sharing within the financial sector will encourage the financial sector to embrace data-driven innovation for more innovative products for consumers and businesses.

Addressing challenges and risks associated with the digital transformation, in particular to promote resilience, data protection and appropriate prudential supervision: the Commission presented a legislative proposal on digital operational resilience. Particularly the principle “same activity, same risk, same rules” to ensure consumer protection and to ensure a level playing field between existing financial institutions and new market entrants.

• The benefits of the Digital Finance Strategy

The anticipated benefits of the European Digital Finance Strategy are many, and those highlighted by the European Commission are:

• unleashing European innovation and creation of opportunities to develop better financial products for consumers,
• supporting Europe’s economic recovery strategy and the broader economic transformation by opening up new channels to mobilise funding,
• accelerate cross-border operations and enhance financial market integration in the Banking Union and the Capital Markets Union, strengthening Europe’s Economic and Monetary Union,
• strengthening Europe’s ability to reinforce strategic autonomy in financial services and the Union’s capacity to regulate and supervise the financial system to protect Europe’s financial stability and values.

How will the strategy be implemented?

The European Commission intends for the strategy to be implemented in a market-wide fashion and a society-wide driven, open platform. It encourages consumers, businesses, established financial firms, new fintech companies and all other stakeholders to engage actively, as the Commission will be working actively with legislators and the supervisory community at both European and national levels. At the same time, individually Member States and national competent authorities are expected to continue and expand their innovative initiatives.

Which initiatives are already part of the Digital Finance Strategy?

1. Legislative proposals on crypto-assets, MiCA and DLT pilot regime

By far the most important and challenging legislative proposal that is part of the Digital Finance Strategy concerns crypto-assets.

As per the Commission,

Crypto-assets are digital representations of values or rights, which can be transferred and stored electronically, using specific technology (known as distributed ledger technology, DLT). Crypto-assets are inextricably linked to blockchains, as they are the blocks that make up the chains themselves.

Crypto-assets come in different forms with varying purposes, rights and functions. A crypto-asset can serve as an access key to a service referred to as a utility token, its purposes can be to facilitate payments referred to as payments token, and a crypto-asset can also be developed to act as a financial instruments referred to as security token.

Although, some crypto-assets such as security tokens, already fall under existing EU financial services legislation and will remain subject to that legislation, the existing rules most often predate the emergence of crypto-assets and distributed ledger technology (DLT). This makes it difficult to apply the financial services regulatory framework to crypto-assets and hinders innovation in the adoption of DLT in the financial sector. Based on this, the European Commission is proposing a pilot regime for market infrastructures that trade and settle transactions in financial instruments in crypto-asset form.

This pilot regime will allow for derogations from existing rules, and thus enable regulators to gain experience on the use of DLT in market infrastructures and for companies to test out solutions utilising DLT. The intention is to learn more about how existing rules can work with DLT.

2. Legislative proposals on DORA (digital operational resilience)

Then 2^nd legislative proposal carries a cute acronym – DORA, which stands for Digital Operational Resilience Act. What is meant by digital operational resilience is the capacity to ensure that a financial firm can withstand all types of Information Communication Technologies (ICT) risks. As financial sector firms handle and store sizeable amounts of client data the dependency on software, makes ICT disruption risks inherent in finance. The Commission proposes that all financial firms abide to strict standards in order to limit the impact and further propagation of ICT threats of disruption.

3. The Retail Payments Strategy

The Payments Services Directive 2 (PSD2) introduced rules to ensure secure and efficient payments. Innovations such as Instant SEPA mean the now payments can take place within seconds. Neobanks, challenger banks, licensed with an electronic money institution (EMI) license are challenging traditional banks and provide themselves payment services. These fintech firms are playing an increasingly important role. The Commission has presented a strategy to further develop the payments sector towards innovation and opportunities of digitalisation. Consumer protection and security remain at the core, with the aim being to make EU-wide solutions for payments accessible and cost effective for citizens and businesses across Europe.

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.