European Commission Rolls out Digital Finance Package
At the beginning of the year, the European Commission committed to making the digital transition a key policy priority. On 24 September 2020 the EC adopted the "Digital Finance Package", which includes various legislative proposals and a digital finance strategy for addressing the upsides and risks relating to the digital transformation of finance.
The EC names four priorities for the digital transformation: defragmentation; facilitating digital innovation in the interests of consumers and market efficiency; creating a financial data space while promoting data driven innovation; and addressing challenges and risks associated with the digital transformation (see EC, QA 24 September 2020).
Addressing fragmentation in the digital single market for financial services is of utmost importance, as cross-border business and associated regulatory risks have been one of the main obstacles confronting innovative service providers and products in recent years, a fact that in light of the borderless nature of digital services has been particularly difficult to understand from both a service provider and consumer perspective. The EC now seeks to introduce passporting in "key areas relevant to digital finance", including a passport for crypto-asset service providers. Bearing in mind that the crowdfunding passport was presented in 2018 as part of the "fintech action plan" and is still going through the legislative process (Directive and Regulation having been adopted in July 2020), some patience is, however, still warranted.
As an important and notable pillar of the defragmentation priority, the EC has announced yet another amendment to the harmonised anti-money laundering framework. New rules shall ensure that digital identities can be used EU-wide by "interoperable digital identity solutions" based on a remote on-boarding process, not only for AML purposes, but also for meeting consumer due diligence requirements. The EC also addresses the fact that the digital transformation is largely data driven and that access to data and data sharing within the financial sector must be enabled and aligned with data protection and competition rules. The EC seeks to ensure that market efficiency and consumer protection considerations are at the centre of the upcoming regulatory framework. This trade-off between market access and defragmentation on the one hand and harmonised regulatory standards in the field of market and consumer protection on the other hand is of course an established concept and thus was to be expected. The commission stresses the importance of maintaining a level playing field between established and new market participants and to ensure financial stability and market integrity. The pilot regime for DLT market infrastructure is an interesting policy approach in this context.
Overall, the Digital Finance Package is a lot to unpack. Of particular note:
the proposal for a Regulation on digital operational resilience for the financial sector (DORA) and a corresponding Directive amending inter alia CRD, UCITSD, AIFMD and MIFID II that also clarifies the definition of "financial instruments" under MIFID II to explicitly encompass instruments issued on a DLT;
the proposal for a Regulation on a pilot regime for DLT market infrastructure that shall allow market participants to operate DLT market infrastructures and provide services on a cross-border basis limited to certain securities and subject to a number of requirements;
the "Retail Payments Strategy for the EU" that specifically addresses digital payment solutions; and
the proposal for a Regulation on markets in crypto assets (MiCA), which addresses crypto assets and service providers outside existing financial regulation, such as wallets and exchanges, as well as stablecoins.
For further information, please contact Dr. Hannes Arnold, M.B.L.-HSG