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Europe & Market Legal Framework

Digital finance package: the innovations introduced by EU

The European Commission presented a new Digital Finance package on 24 September 2020. It is a package that is positioned at both a strategic and regulatory level and which overall aims to standardize financial services regulations and support their digital development in order to produce concrete benefits for both citizens and businesses. All this by seeking to ensure financial stability, respect for privacy and the fight against money laundering.

The corpus of the digital finance package is developed along four main lines: the Digital Finance Strategy, the Retail Payments Strategy, legislative proposals for a common regulatory framework at EU level on crypto-assets and a proposal for a regulatory framework on operational resilience.

The Digital Finance Strategy

The Digital Finance Strategy aims to stimulate the digitalisation of financial services, stimulating innovation and competition between the various competitors in the European Union, whether they are traditional operators or from the digital world, i.e. the Fintech sector. The strategy is based on the “same activity, same risk, same rules” principle, creating a level playing field between all financial services providers. A further objective is to ensure that the new financial environment supports the new industrial strategy for Europe and encourages the development and growth of highly innovative digital startups.

The strategy considers digital innovation a pillar in the world of finance. In fact, it is now clear that innovations based on Distributed Ledger Technology, artificial intelligence, but more generally those based on Information and communication technology (ICT), are able to improve services for consumers and businesses that therefore benefit from easier access to financial services and greater control over their assets. The push towards a European financial area that promotes Open Finance also implies the proposal of a European digital finance platform: by 2024 the European Commission envisages the introduction of new licences with an EU passport that will allow the birth of a European digital platform.

The Retail Payments Strategy

The second theme of the digital finance package presented by the European Commission is the Retail Payments Strategy: the strategy for innovative retail payment services and solutions.

The objective of the European Commission is to achieve a homogeneous retail payment system across the European Union that includes solutions for instant cross-border payments. This strategy should therefore ensure digital, immediate and efficient payment systems, operating at pan-European level, creating innovative and potentially more competitive retail markets.

Markets in Crypto-Assets (MiCA)

The European Commission presented on september 24th, 2020 a new legislative package to support Digital Finance, the so-called Markets in Crypto-Assets (MiCA) regulation which aims to achieve a regulation of crypto-assets (digital identity, open Finance, stablecoin, blockchain-based assets), applicable at European level in all member States, which should come into force by the end of 2022. This is the most extensive regulation of digital assets ever made to date and seems to promise great opportunities in terms of development and growth for the entire financial ecosystem.

The European Commission aims to reduce the legal fragmentation of the digital market that still exists among many EU member States. Before the MiCA agreement, companies operating at national level often had to adapt their international business to the financial policy of each Country and this entailed high costs. This regulation, which is directly applicable throughout Europe, can concretely reduce the difficulties faced by Fintech service providers. In addition, the greater uniformity of the European financial regulatory framework will promote a level playing field between financial operators, which is lacking when heterogeneous regulations coexist.

The regulation introduces the possibility to define a pilot regime for crypto-assets, tokens, and Distributed Ledger Technology solutions for the capital market like tokenized securities, trading and post-trading and the reclassification of token, stablecoin and CBDC definitions. In these experimental environments both the technological infrastructure and the adequacy of regulations can be put to the test.

Digital resilience framework

The regulatory framework on the digital resilience of technological solutions in the financial sector is designed to contribute to the increase in operational security safeguards. In essence, every company operating in the financial sector will need to ensure that it is able to cope with or limit the damage caused by any type of cyber- attacks or disasters related to its technological infrastructure.

New challenges and risks

The regulatory framework of the digital finance package highlights new challenges related to digital finance that are necessarily associated with potential risks to be faced: first and foremost that of financial stability, which is more complicated to safeguard when the digital component comes into play, as well as the protection of privacy, consumer safety and the integrity of the financial market. The European Commission will therefore propose by mid 2022 the necessary adjustments to the existing legislative framework for financial services with regard to consumer protection and appropriate rules to protect end users from the risks of digital finance, safeguard financial stability, protect the integrity of the EU financial sector and ensure a level playing field.

Although the digital finance package has just been presented, it shows great opportunities and a regulatory principle for crypto-assets that could soon put them on the same level as existing traditional financial products.

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