EU Unveils Digital Finance Strategy, Crypto-asset Framework

The package consists of a digital finance strategy, a retail payments strategy, and legislative proposals for regulating the crypto-asset sector.

The European Commission has adopted a new ‘Digital Finance Package’, aimed at boosting Europe’s competitiveness and innovation in the financial sector.

The package also aimed at giving consumers more choice and opportunities in financial services and modern payments, and ensuring consumer protection and financial stability, the Commission says.

“The future of finance is digital,” said executive vice-president Valdis Dombrovskis. “We saw during the lockdown how people were able to get access to financial services thanks to digital technologies such as online banking and fintech solutions.”

“Technology has much more to offer consumers and businesses and we should embrace the digital transformation proactively, while mitigating any potential risks. That’s what today’s package aims to do. An innovative digital single market for finance will benefit Europeans and will be key to Europe’s economic recovery by offering better financial products for consumers and opening up new funding channels for companies.”

Digital Finance Strategy

The Digital Finance Strategy sets out how the EU will support the digital transformation of finance in the coming years, while regulating its risks.

The strategy’s four main priorities include removing fragmentation in the ‘Digital Single Market’; adapting the EU regulatory framework to facilitate digital innovation; promoting data-driven finance including by enhancing data sharing within the financial sector; and addressing the challenges and risks with digital transformation.

As part of the strategy, the Commission will propose in 2021 to harmonise rules on customer onboarding and to build on its upcoming review of e-IDAS to implement an interoperable cross-border framework for digital identities.

The Commission will also explore the need to introduce additional harmonised licensing and passporting regimes and establish an EU digital finance platform to foster cooperation between private and public stakeholders.

EU legislation will also be amended to ensure that publicly disclosed information is available in standardised and machine-readable formats, and an EU-funded infrastructure for public disclosure will be set up (as part of the Capital Markets Union Action Plan).

The Commission will present a strategy on supervisory data in 2021, and a legislative proposal for a new open finance framework by mid-2022, building on and in full alignment with broader data access initiatives.

By mid-2022, the Commission will also propose legislative changes to enhance consumer protection and prudential rules, in order to protect end-users of digital finance, safeguard financial stability, protect the integrity of the EU financial sector, and ensure a level playing field.

Retail Payments Strategy

The Retail Payments Strategy aims to bring safe, fast and reliable payment services to European citizens and businesses, making it easier for consumers to pay in shops and make e-commerce transactions safely and conveniently.

It seeks to achieve a fully integrated retail payments system in the EU, including instant cross-border payment solutions, which will also facilitate euro payments with other non-EU jurisdictions. The Commission says it will promote the emergence of home-grown and pan–European payment solutions.

As part of the strategy, the Commission will decide by end-2021 whether it is appropriate to propose legislation requiring payment service providers to adhere to the SEPA Instant Credit Transfer Scheme. Such a proposal, if decided, would lay down the criteria for determining which payment service providers should be subject to obligatory participation.

The Commission will also explore the feasibility of developing a ‘label’, accompanied by a visible logo, for eligible pan-European payment solutions. Access by non-bank players to all payment systems will be enabled by revising existing legislation as necessary.

The Commission says it supports the work of the ECB (European Central Bank) to explore the possible issuance of a retail CBDC (central bank digital currency), and will support this work by fostering cooperation between the private and public sectors.

EU regulatory framework on crypto-assets

The proposed new legislation on crypto-assets – the ‘Regulation on Markets in Crypto Assets’ (MiCA) – defines the regulatory treatment of all crypto-assets, including utility tokens, asset-referenced tokens and e-money tokens, with the latter two capturing the ‘stablecoin’ universe.

The legislation seeks to boost innovation, preserve financial stability, protect investors from risks, and provide legal clarity and certainty for crypto-asset issuers and service providers – such as crypto-asset trading platforms, exchanges and wallet services.

The new rules will grant operators authorised in one Member State passporting rights that allow them to provide their services across the EU. Under the rules, crypto-asset service providers must have a physical presence in the EU to be authorised, and will be subject to capital requirements, governance standards, IT requirements, and an obligation to segregate their clients’ assets from their own assets.

The rules also explicitly prohibits market abuse such as insider dealing and manipulation in secondary markets, and require crypto-asset service providers to put in place surveillance and enforcement mechanisms to deter such abuse. They also set out the rights of investors against issuers and a requirement for a mandatory complaints procedure to be available to investors.

The Commission proposes a ‘bespoke’ regime for authorising “significant” stablecoin issuers, subjecting them to more stringent requirements in terms of capital, investor rights and centralised supervision from the EBA (European Banking Authority). The rules for stablecoin issuers also include governance requirements, rules on conflicts of interests, disclosure of stabilisation mechanisms, investment rules, and additional whitepaper requirements.

The Commission also proposed to introduce a pilot regime for companies to develop and test market infrastructures for trading and settling financial instruments such as shares or bonds in crypto-asset form. Operating under a ‘sandbox’ approach, the pilot will allow temporary derogations from existing rules so market participants and regulators can gain experience on the use of DLT (distributed ledger technology) for trading and settlement, while ensuring risks are contained.

EU regulatory framework on digital operational resilience

The proposed new legislation – the ‘Digital Operational Resilience Act’ (DORA) – aims to ensure that all participants in the financial system have the necessary safeguards in place to withstand all types of cyber attacked and ICT (information & communication technologies) related disruptions and threats.

“The overall objective is to strengthen the digital operational resilience of the EU financial sector by streamlining and upgrading existing EU financial legislation and introducing new requirements where gaps exist,” the Commission says.

“More specifically, the proposal would create a more coherent and consistent incident reporting mechanisms and thus reduce administrative burdens for financial institutions and strengthen supervisory efficiency.”

The proposal will also introduce an oversight framework for ICT providers such as BigTechs that provide cloud computing services to financial institutions.

It is expected to take more than a year before the legislative proposals are implemented, as they need to be approved by EU governments as well as the European Parliament before they can become law.

The full details on the Digital Finance Package are available here.


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