EU Recent Developments in Cryptocurrencies Regulation:Digital Finance Package and Digital Finance Strategy

We are happy to present a series of articles dedicated to the latest developments in the European Union regulation regarding the digital sphere in general and the crypto niche in particular. We’ll discuss the existing legal environment, proposed amendments, and potential consequences. Stay tuned!

Background 

On September 24^th, 2020, the European Commission endorsed a Digital Finance Package (DFP). It comprises the EU Digital Finance Strategy (DFS) for the next 5 years and several proposals for legislative amendments:

• regulation on markets in crypto-assets (MiCA)
• regulation on digital operational resilience (DORA)
• regulation on a pilot regime for market infrastructures based on distributed ledger technology (the Pilot Regime)
• an “omnibus” directive amending sectorial legislation

The DFP’s goal is to facilitate digital finance transformation and encourage the creation and acceptance of emerging financial products inside the EU, considering the protection of consumer rights and preserving the financial system's resilience.

Concurrently with the DFP, a retail payments strategy was endorsed. Its role is to enforce the regulatory foundations to accelerate the creation of new payment solutions.

The current article deals with the DFS to examine the issues it tackles and the solutions offered.

DFS in Brief

The DFS reflects four critical points to bolster the digital finance industry in 2020-2024 to make it business-oriented and consumer-friendly:

• assuring uniformity of the Digital Single Market
• modifying the EU legal landscape to accelerate modernization
• establishing a unified space for financial data to promote innovations backed by data
• tackling the hazards connected with digital shifts

The DFS is set up to deal with finance digitalization and ensure the market representation of the niche stakeholders, notwithstanding their roles and size. 

Assuring Uniformity of the Digital Single Market

The first aim declared is combatting the fragmentation in the EU legislation to expedite the rendering of cross-border services by financial market stakeholders. For instance, FinTech projects currently face legislative impediments hindering their cross-border development. This aim also considered the necessity of supplementary harmonized legislation in passporting and licensing and the extension of “one-stop shop licensing” to cover various actors.

To promote a comprehensive AML reform, the unified rules concerning the onboarding of customers are underway. Establishing a new platform dealing with digital finance is also underway to bolster the interaction between actors of the public and private sectors.

Modifying the EU Legal Landscape to Accelerate Modernization

The European Commission outlined that the legal basis aimed at digital finance should be treated with enhanced attention where it deals with financial technologies implementing artificial intelligence. Such emerging technologies cause legal risks to be also taken into consideration. However, a balanced approach should be followed to ensure the adaptability of emerging regulations to existing technologies. 

This aim is supposed to be achieved through legislative changes – MiCA as a comprehensive legal initiative targeting cryptocurrencies and affiliated providers of services, and the Pilot Regime as the first proposal dealing with distributed ledger technology. 

Moreover, the Commission declared an intention to upgrade further the legal grounds for investments in software and contribute to the acceptance of artificial intelligence tools.

Establishing a Unified Space for Financial Data to Promote Innovations Backed by Data

The third aim of the DFS is to enhance the data availability and enable access in real-time to all monitored financial information. This aim corresponds to the objectives set in the Commission’s new data strategy for Europe. Attainment thereof will create the prerequisites for utilizing new tools like ‘RegTech’, which is supposed to expedite conformity with regulatory reporting standards.

The bottom line of the third aim is to promote data sharing among all the actors in finance, not solely the financial supervising authorities. This topic has been broadly discussed after EU Directive 2015/2366 on payment services facilitated the sharing of customer data and contributed to open banking in general. 

Consumers are likely to benefit from open finance as well as the promotion of the availability of innovative data-backed financial services developed both by conventional banks and newcomers like FinTechs. 

Tackling the Hazards Connected with Digital Transformations

The financial markets’ actors are constantly changing. With tech businesses becoming new participants, consumers and investors face new risks. The DFS underscores the “same activities, risks, and rules” principle, as it is crucial to establish equal levels of consumer rights protection, notwithstanding companies’ business concepts. DORA, a regulation for digital operational finance, was developed to attain the fourth goal.

Conclusion

The DFS is supposed to encourage competition within the EU market, as the unified space for financial information and the expansion of open finance shall trigger innovation opportunities in financial activities. Ensuring uniformity in the Digital Single Market will assist stakeholders in upscaling their cross-border ventures challenging the current actors.