New EU digital finance rules by the end of 2020

By Giovanni Campi

In a recent address on digital finance in the context of the European Commission’s Digital Finance Outreach, European Commission Executive Vice-President Valdis Dombrovskis, shared some of the Commission’s thinking on technological innovation and digital finance.

In April 2020, the Commission launched a consultation on digital finance focusing on: (i) promoting innovative digital financial services; (ii) ensuring that regulation is technology-neutral and innovation-friendly; (iii) the challenges of regulating a diverse array of firms ranging from BigTechs to FinTechs; (iv) open finance and the need for a more data-driven financial sector; and (v) enhancing the digital operational resilience of the EU financial framework. The consultation’s feedback will inform the Commission’s Digital Finance Strategy, expected to be published in Q3 2020.

Building on the consultation’s main objectives, he underscored that the Commission will:

Ensure the regulatory framework is fit for the digital age. The suitability of the regulatory framework has been in question ever since crypto-assets, global stablecoins and distributed ledger technology became mainstream. Many crypto-assets do not fall under the current regulatory perimeter, even though they pose threats in consumer protection, market integrity and financial stability. For these crypto-assets, the Commission will propose a bespoke regime and a passport for markets. Notwithstanding, for crypto-assets already covered by EU laws, he noted that the Commission will introduce a sandbox with some regulatory flexibility for experimentation “but well-framed and under close supervisory oversight.”

Impose stricter regulation for risky crypto-assets. Concerning stablecoins, he added that a regulatory distinction should be made between global stablecoins backed by BigTechs and those created by smaller FinTechs given the systemic risks that the former can pose. Stablecoins can lead consumers to assume that their holdings are as safe as bank deposits, which are protected by the banks’ deposit guarantee scheme. This results in underestimations of the associated risks in what is effectively an investment in financial assets.

Strengthen the operational digital resilience of the European financial system. He indicated that the Commission will bolster the EU cybersecurity rules by putting forward new standards in early autumn 2020 for all financial institutions. As regards third-party ICT providers, like cloud services, he underpinned their crucial role in helping financial institutions overhaul their IT infrastructure. In this regard, he underlined the need for a separate oversight framework, including rules to deal with the concentration risks of multiple financial institutions using the same handful of outside providers.

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