In what is considered by many as a decisive year for the European Union’s ambitions in the digital field, with the presentation of the Commission’s proposals on digital services and markets – the Digital Services Act (DSA) and the Digital Markets Act (DMA), the framework on artificial intelligence and personal data governance, a political issue of particular interest is emerging in the background: the relationship between these new rules and the tools that financial innovation “invents” every day.
The search for the “right balance” between new technological developments and regulation has been, and still is, at the center of ongoing discussions in European institutions on the “digital finance” package. Presented by the Commission on September 24, 2020, this package of measures aims to promote the potential of fintech in terms of innovation and competition, while reducing associated risks.
According to a study by EY, funding for startups active in the sector in Italy has grown by over 60% per year from 2016 to 2019. Digital finance is indeed a rapidly growing phenomenon, further accelerated by the Covid-19 pandemic, which is revolutionizing the traditional way of providing financial services.
This is the case, for example, with “blockchain“, which is nothing more than a digital database, stored on all nodes of the network, rather than on a central computer, whose entries are grouped into a chain of blocks linked in chronological order. These form a register accessible and verifiable in a shared manner by users participating in the network through complex mathematical algorithms, which guarantee the security of data. It is therefore a “distributed”, not hierarchical, register, because it is not maintained by an intermediary that manages transactions, as may be the case with a bank.
But while understanding what blockchain is and how its technology works can be complicated, it is not difficult to see all its potential today in terms of innovation in the financial sector, as often reported by your authoritative blog. Innovation that makes it possible to respond to the various needs of companies, citizens, and the public sector: most recently, at the beginning of June, the Commission recognized a role for blockchain in the proposed regulation on the creation of an interoperable “digital wallet” for all resident citizens and businesses of the Union, which will offer the new possibility of using data for all types of services, including, for example, opening a bank account.
In recent years, I believe there has been a significant change in expectations regarding blockchain. In particular, the development of crypto-assets, one of the main applications of blockchain in the financial sector, has attracted a lot of attention even among non-experts, which presents a series of challenges, largely unprecedented, that as policymakers we cannot ignore.
In fact, some crypto-assets do not fall within the scope of EU financial regulation and therefore are not subject, among the various measures, to rules on consumer and investor protection. These latter are thus exposed to substantial risks.
As part of the “digital finance” package, two draft regulations are currently under examination by the Economic Affairs Committee (ECON) of the European Parliament:
- The first proposal, which focuses on crypto assets not covered by European legislation, introduces obligations to prevent market abuse and protect investors’ interests, particularly in relation to so-called stablecoins (MiCA regulation proposal).
- The second proposal, which concerns Distributed Ledger Technology (DLT), i.e., systems that rely on a distributed ledger, such as blockchain, introduces a first regulatory framework for experimentation – establishing uniform operational requirements, an authorization procedure, and a monitoring system – aimed at allowing market infrastructures using these technologies to operate under a temporary exemption from some specific requirements currently in force. Such regulation, in fact, risks placing obstacles to the full development of innovative solutions based on DLT if it does not take into account this technology (proposal for a pilot DLT regime regulation).
Based on the position reached by the Parliament, negotiations with the Council will subsequently be initiated in order to conclude an interinstitutional agreement on the two Commission proposals.
Effective and consistent regulation, together with adequate investments to prevent Europe from lagging behind China and the US, is the key to creating the best conditions for positioning Europe as an innovative and sustainable center for fintech companies. All of this without giving up the effective fight against abuses and fraudulent behavior, thus maintaining consumers’ trust in finance, both in the new and traditional spheres.
A recent study by the European Parliament’s research service estimates that effective regulations in this area would lead to a potential increase in value-added in the financial sector from €27 to €55 billion.
The disruptive transformation brought about by digital finance can therefore bring new opportunities for companies and benefits for investors, but also possible uncertainties. The parliamentary debate will undoubtedly be very intense and participatory: on my part, I will continue to promote the idea of an ambitious agreement that promotes innovation and makes it more accessible to everyone while ensuring that our consumers and savers can operate safely in the online world.
Market and Data
_old_Become an author
Wallet
