On March 8, 2018, the European Commission (EC) – the independent executive arm of the European Union (EU) – published a comprehensive document entitled "FinTech Action plan: For a more competitive and innovative European financial sector."
Earlier this week, ETHNews reported on the document before it was officially published. The EC predictably preached the importance of supporting innovation while ensuring consumer protection. The institution encouraged international coordination and careful consideration of whether the regulatory environment needs to adapt to recent developments.
In a release today, the EC explained that the FinTech Action plan is part of its "efforts to build a Capital Markets Union (CMU) and a true single market for consumer financial services," as well as "part of its drive to create a Digital Single Market." In the plan, the EC recapped EU actions related to cryptocurrencies and initial coin offerings (ICOs), outlined the EU approach to establishing a suitable FinTech regulatory regime, and proposed a pan-European licensing arrangement for "innovative business models." Furthermore, the plan raised discussion about blockchain technology and suggested that existing rules might require reworking in the financial sector and beyond.
Crypto-Assets and Initial Coin Offerings (ICOs)
The EC outlined the EU's study and regulation of virtual currency developments over the last year.
First, the action plan recounted a June 2017 report, which assessed "the threat and vulnerability" of virtual currencies being used for money laundering and terrorist financing as being "significant" to "highly significant." Next, the commission recalled the European Parliament and European Council's December 2017 agreement to extend KYC and AML measures to cryptocurrency exchanges and wallet providers, which represented a revision to the EU's Fourth Anti-Money Laundering Directive. EU countries were given 18 months to formally adopt the revisions and pass them on the national level. The FinTech action plan then remarked upon the European Supervisory Authorities (ESAs), which issued a consumer warning regarding cryptocurrency in February 2018.
"All warnings point to the fact that crypto-asset investment is high risk and that investors may incur substantial losses due to their volatility but also due to the lack of market transparency and integrity and operational weaknesses as well as vulnerabilities in crypto-asset services and trading venues," the EC concluded.
The EC also addressed the prevalence of ICOs and their associated dangers:
"Speculative investments in crypto-assets and ICO-tokens expose investors to significant market risk, fraud and to cybersecurity risks arising from exchanges and service providers that allow investors to purchase crypto assets and tokens, hold them or trade them."
The commission pointed out that in November 2017, the European Securities and Markets Authority (ESMA) warned the public of the risks associated with ICO investments and reminded firms to abide by international and domestic legal requirements. The FinTech action plan called for a "better understanding" of the risks and opportunities related to crypto-assets as well as the potential application of EU regulation.
"An assessment of the suitability of the current EU regulatory framework with regard to Initial Coin Offerings and crypto-assets more generally is necessary," the commission determined.
"The EU framework proposed in this Action Plan will offer a comprehensive European passporting regime for those market players who decide to operate as European crowdfunding service providers (ECSP)," the EC wrote.
In essence, the goal is to streamline the regulatory environment for FinTech firms by creating an EU-wide licensing arrangement.
"An EU crowdfunding license would help crowdfunding platforms scale up in Europe," said European Commission vice president Valdis Dombrovskis. "It will help them match investors and companies from all over the EU, giving more opportunities for firms and entrepreneurs to pitch their ideas to a wider base of funders."
Acknowledging that "further efforts are needed to identify diverging licensing requirements that affect FinTech firms," the EC suggested possible follow-up actions, which included:
- "clarifying the applicable EU legislative framework for services;
- assessing the need for an EU framework to cover new innovative business models; and
- providing guidance to national supervisors to ensure more convergence between national regulatory regimes."
It's not immediately apparent whether European-based ICOs would be eligible for this proposed licensing system.
"Considering the cross-cutting nature of blockchain, which goes beyond financial services and potentially encompasses all sectors of the economy and society, the Commission has already taken steps to set up an EU blockchain initiative with the launch of the EU Blockchain Observatory and Forum," the FinTech plan explained.
"The initiative will propose actions, funding measures and a framework to enable scalability, develop governance and standards, and to support interoperability."
The EC also said that it has fostered a relationship with the International Organization for Standardization's Technical Committee 307, which is establishing global blockchain standards. The commission acknowledged concerns about whether blockchain technology and its accompanying innovations could be hampered by existing rules. Public consultations raised questions about the following:
- "blockchain-based applications may raise jurisdictional issues about the law applicable and liability issues;
- the legal validity and enforceability of smart contracts may need clarification; and
- there are uncertainties surrounding the legal status of ICOs and the rules applicable to them."
"Technologies like blockchain can be game changers for financial services and beyond," said Mariya Gabriel, commissioner for the digital economy and society. "We need to build an enabling framework to let innovation flourish, while managing risks and protecting consumers."
Additional aspects of the FinTech Action Plan include:
- An EU FinTech Laboratory where European and national authorities "will engage with tech providers in a neutral, non-commercial space," hosted by the European Commission;
- Consultation by the commission on the best way to go about digitizing information published by publicly-listed European companies, including connecting national databases;
- Commission-run workshops to "improve information-sharing" related to cybersecurity issues; and
- A forthcoming blueprint from the commission on best practices for regulatory sandboxes, which will be "based on guidance from the European Securities Authorities."
Altogether, the European Commission's FinTech action plan provides background about the regulatory landscape and plots a course for the continent's digital future. Perhaps, the EC put it best when it wrote, "The goals [of the action plan] are threefold: to harness rapid advances in technology for the benefit of the EU economy, citizens and industry, to foster a more competitive and innovative European financial sector, and to ensure the integrity of the EU financial system."