Financial markets and companies’ business models have long been exploring the benefits of a digital environment. However, the Covid-19 pandemic has shown that the “proof of the pudding is in the eating”, and has made it clear that digital finance can provide great opportunities and solutions for both citizens and businesses.
The European Commission has recently shown it is on the same page: on 24 September 2020, the Commission presented a voluminous Digital Finance Package (DFP), which includes not only a forward-looking digital finance strategy, but also legislative proposals on crypto-assets and digital resilience. The plan is underpinned by four important ambitions, which will serve as leading principles in the further elaboration of the intended measures.
Below we briefly discuss the key take-aways from the DFP. Besides outlining the core ambitions of the presented strategy, we highlight the significant features of the Proposal for a Regulation on Markets in Crypto-Assets (MiCA). In addition, we briefly touch upon the Proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT). A reflection on the potential impact of the discussed features on the existing Belgian regulatory framework concludes this newsletter.
The four core ambitions of the EU digital finance strategy – key elements
The DFP is underpinned by the following ambitions:
- Reducing fragmentation in the Digital Single Market for financial services;
- Adapting the EU regulatory framework to facilitate digital innovation in the interests of consumers and market efficiency;
- Creating a European financial data space to promote data-driven innovation; and
- Addressing new challenges and risks associated with the digital transformation.
The first ambition expresses the Commission’s intention to enhance European financial firms’ capability to scale up their digital operations, reducing the current obstacles to the provision of cross-border services. For instance, by implementing additional licensing and passporting regimes, the revised system would allow consumers access to EU-wide financial services The European Commission will propose in 2021 – as part of a broader initiative on AML/CFT to harmonize rules on customer onboarding – an interoperable cross-border framework for digital identities. . It goes without saying that this would go hand in hand with a reduction in costs and an increase in quality on the part of financial providers.
Regarding the second ambition, the Commission proposes “future-proofing” existing EU legislation by, among other things, integrating new technologies such as artificial intelligence, distributed ledger technology and cloud computing into the financial regulatory framework. This should maximize the opportunities for both developing and established companies.
The third ambition focuses on the vast and emerging world of data. Key priorities are the creation of an “open finance” framework that promotes business-to-business data sharing, the implementation of EU infrastructure to facilitate access to all publicly available disclosed information and the introduction of the necessary conditions to enable the use of innovative technologies for supervisory reporting. The ultimate goal is a balanced structure that ensures a smooth transfer of data but also effectively protects data subjects.
In addition to numerous opportunities, the digital transformation also entails significant risks and challenges. The fourth and last priority is to address all of the associated difficulties. More specifically, the Commission will seek to adapt the prevailing prudential system so as to continue safeguarding financial stability and to secure a high level of consumer protection. In this respect, the principle of “same activity, same risks, same rules” will play a pivotal role.
The legislative proposals on crypto-assets (MiCA) and distributed ledger technology (DLT)
One of the key elements of the DFP is the MiCA.
Crypto-asset trading has been a fast-growing part of the financial sector. The technology behind it, blockchain or digital ledger technology, fundamentally transforms the traditional way of performing transactions which makes them an interesting target for money laundering. Bitcoin serves as a good example.
A common EU approach is a very welcome initiative as existing EU legislation is not able to resolve legal questions surrounding crypto-assets, and fragmented regulatory answers are emerging at Member State level. MiCA forms part of a larger framework and is supported by other proposals (e.g. on digital resilience), the overall objective being a robust regulatory path that is free of obstacles for new technologies.
The draft MiCA is intended to cover assets, markets and service providers that currently slip through the regulatory net.
Ratione materiae, the draft MiCA applies to “all representations of value or rights that may be transferred and stored electronically, using distributed ledger and similar technology”. Despite this broad definition, the Commission emphasises that MiCA would not apply to assets that are already within the scope of other EU legislation (with a few exceptions, such as e-money tokens). Whether or not that is the case, depends on the characteristics of the asset in question (“substance over form”).
Ratione personae, MiCA imposes various requirements to crypto-asset issuers and service providers. In that respect the regulation combines both well-known and new EU concepts. Well-known is the obligation to obtain prior regulatory authorisation from a national competent authority (NCA), which MiCA imposes on crypto-asset service providers. Providers will be able to use their authorisation as an “EU passport” across the Single Market. New, although “borrowed” from other EU sets of rules, is the obligation for crypto-asset issuers to issue a so-called “white paper” that contains relevant information on a specific crypto-asset. This information tool is in many respects comparable to a prospectus, but unlike the latter the white paper need merely be notified to (and not pre-approved by) the NCA. Interesting to note is that the white paper must assess why the crypto-asset does not qualify as a MiFID financial instrument.
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are tasked with administering MiCA. Before the draft MiCA was adopted EBA looked at crypto-assets in the context of anti-money laundering whereas ESMA set crypto-assets alongside financial instruments.
A last remark concerns the proposed rules on DLT that facilitates crypto-assets. This proposal imposes requirements on multilateral trading facilities and securities settlement systems using DLT market infrastructures. DLT is a gamechanger, turning traditional transactions and processes upside down. Putting innovation in a regulation could, however, impede its dynamics; a legal framework could be described a “necessary evil”.
The EU digital finance package and the Belgian regulatory framework – outlook
Let us shift our focus from EU to national level and look at the state of play in Belgium.
In general, it is fair to say that Belgian legislative initiatives concerning digital finance remain forthcoming. This will of course change once the draft Regulations under the DFP are formally adopted, as they will have direct effect in all member states. The DFP’s arms will also stretch out to various other EU Directives, changes to which will seep through Belgian legislation. For instance, MiCA might affect the notion of ‘e-money’ under the E-Money Directive. By contrast, the notion of “virtual currencies” under the 5th Anti-Money Laundering Directive – which was recently implemented in Belgian law by Act of 20 July 2020 – would not require any amendments, so the Commission claims.
To date the Belgian NCAs, the Financial Supervisory and Markets Authority (FSMA) and the National Bank of Belgium (NBB), have expressed concerns in respect of crypto-assets. A list of alleged fraudulent crypto platforms is available on FSMA’s website. In addition, the FSMA has issued a ban on marketing certain financial products, which includes derivatives based on virtual currencies. MiCA may help allay the regulators’ concerns.
There is a broad consensus among businesses, investors and policymakers that crypto assets and the technology behind it, are promising. We eagerly look forward the way the DFP will be implemented by the both the Belgian legislator and the Belgian NCAs.