European Digital Finance Package opens doors for digitalization of financial system
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European Digital Finance Package opens doors for digitalization of financial system

Recently the European Commission has adopted a Digital Finance Package, including Digital Finance and Retail Payments Strategies, and legislative proposals on crypto-assets and digital resilience. It is expected that it will boost Europe’s competitiveness and innovation in the financial sector and it will give consumers more choice and opportunities in financial services and modern payments, while at the same time ensuring consumer protection and financial stability.

Renewed strategy for modern and safe retail payments

The Package consists of (i) a strategy on digital finance and on (ii) retail payments, together with (iii) legislative proposals on crypto assets and on (iv) operational resilience.

(i) The Digital Finance Strategy sets out general lines on how the EU can support the digital transformation of finance in the coming years, while regulating its risks. It aims to remove fragmentation in the Digital Single Market, to adapt the EU regulatory framework to facilitate digital innovation, to promote data-driven finance, and addressing the challenges and risks with digital transformation, including enhancing the digital operational resilience of the financial system.

(ii) The Retail Payments Strategy aims to further develop the single payments market to allow the EU to benefit fully from innovation and the opportunities that come with digitalisation. The strategy focuses on four key goals: creating the conditions to make the development of instant payments and EU-wide payment solutions possible; consumer protection and ensuring payment solutions are safe; and lessening Europe’s dependency on big global players in this area.

(iii) The legislative proposals on crypto-assets differentiate between those crypto-assets already governed by EU legislation, and other crypto-assets.

Legislative proposals on crypto-assets

For already regulated crypto-assets, the Commission intends to keep them subject to existing legislation, but it presented a draft proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technology. The pilot regime represents a so-called ‘sandbox’ approach – or controlled environment – which allows temporary derogations from existing rules so that regulators can gain experience on the use of distributed ledger technology in market infrastructures while ensuring that they can deal with risks to investor protection, market integrity and financial stability. The intention is to allow companies to test and learn more about how existing rules fare in practice.

EU member state Lithuania becomes the most progressive EU/EEA jurisdiction allowing the use of blockchain technology in digital finance. Lithuania currently already has national cryptocurrency exchange and crypto wallet authorization frequently used by global crypto busines giants providing services in European territory, says Kestutis Kvainauskas Lithuanian partner of ECOVIS International consultancy group specializing in fintech and digital finance. The best example of progressive regulation is LBChain – the world’s first-of-its kind blockchain sandbox developed by a financial market regulator (the Bank of Lithuania). It combines regulatory and technological infrastructures as well as allowing market participants to test their business solutions in a controlled environment. The platform is aimed at serving the key needs of Blockchain start-ups and provides them with the possibility to gain new knowledge, carry out blockchain-oriented research, test and adapt blockchain-based solutions.

For previously unregulated crypto-assets, including ‘stablecoins’, the Commission presented a draft proposal for a ‘Regulation on Markets in Crypto Assets’ (MiCA), which sets strict requirements for issuers of crypto-assets in Europe and crypto-asset service providers wishing to apply for an authorisation to provide their services in the single market. ). It is expected that MiCA will boost innovation while preserving financial stability and protecting investors from risks. This will provide legal clarity and certainty for crypto-asset issuers and providers. The new rules will allow operators authorised in one Member State to provide their services across the EU (“passporting”). Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer.

Legislative proposals for preventing and mitigating cyber threats

Important to note that the Package also includes legislative proposals for an EU regulatory framework on digital operational resilience, aiming to prevent and mitigate cyber threats. The proposed  ‘Digital Operational Resilience Act’ (DORA) aims to ensure that all participants in the financial system have the necessary safeguards in place to mitigate cyber-attacks and other risks. The proposed legislation will require all firms to ensure that they can withstand all types of Information and Communication Technology (ICT) – related disruptions and threats. Today’s proposal also introduces an oversight framework for ICT providers, such as cloud computing service providers.

The Digital Finance Package builds on the work carried out in the context of the FinTech Action Plan of 2018 and the work of the European Parliament and of the European Supervisory Authorities (ESAs). It also builds on the results of broad public consultations and of the so-called Digital finance outreach.

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