Will the EU Lead the Way in Fintech Regulation?

In March 2018, the European Commission (the EU executive, with an almost exclusive power to propose legislation) presented an Action Plan identifying the bloc’s Fintech priorities. The 19 steps set out by the document pursue the following aims: allowing innovative business models to reach EU scale, supporting the uptake of technological innovation in the financial sector, and enhancing the sector’s security and resilience.

In line with this plan, the Commission has set up an observatory on blockchain, and a platform for cooperation between innovation facilitators, such as innovation hubs and regulatory sandboxes. In parallel, EU legislators should soon introduce rules to increase the cross-border provision of crowdfunding services.

The Commission has yet to decide whether tailored legislation for crypto-assets is needed.

However, several events seem to indicate that it is. The European Banking Authority (EBA) and the European Securities Markets Authority (ESMA), two supervisors, and the European Central Bank (ECB) agree that crypto-assets currently do not pose a meaningful risk to the EU.

Their analysis says that market volume is small and the connection to the real economy immaterial. Nonetheless, they acknowledge that crypto-assets high volatility and possible developments, such as increasing links to the financial sector, with potential impacts on financial stability, require close and continued monitoring.

Concerning future policy action, the EBA and ESMA recently concluded that the current regulatory framework does not cover crypto-assets, except under specific circumstances. The ECB took a similar stance. (An exception is the definition of “virtual currencies”, introduced by EU regulators in the revision of anti-money laundering rules. However, this only refers to supervisory obligations for providers engaged in exchange services between virtual currencies and fiat currencies, and custodian wallet providers.) The two supervisors advised EU lawmakers to adopt a “holistic” approach and a bespoke regime to crypto-asset regulation, stressing the cross-cutting nature of the underlying technology. Among others, the EBA indicated the danger of financial institutions failing to appropriately disclose the risks involved in activities related to crypto-assets. Both supervisors pointed out that the absence of rules might expose consumers to significant risks.

Should the Commission go down the road of introducing a specific set of laws and regulations for crypto-assets, the EU would have the chance to set important regulatory standards that will attract the attention of its global competitors.

One risk is stifling the innovative potential of Fintech. At a high-level event attended by international authorities and the financial industry, Valdis Dombrovskis, the EU’s commissioner in charge of financial stability, affirmed that “despite the risks, crypto-assets still hold potential”, and pledged to ensure that financial regulation does not “hinder this type of useful innovation”.

As the EU is contemplating whether and how to treat crypto-assets, and the US is investigating whether federal or state legislation is even partially equipped, China seems ready to rein in and eventually get rid of cryptocurrency mining.

Nothing much is expected in the EU until the new Commission is sworn in, in November 2019. By 2020, however, a clearer landscape should begin to form. The boldness of the path taken may affect the bloc’s clout in the Fintech arena for years to come - something that is worth keeping an eye on.