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Modern financial technologies, so-called fintech are already greatly facilitating progressive development of the global and European financial markets. Indeed, the better access to financial services and its efficiency’s improvements, due to digital transitions, are benefiting private and public financial systems. The EU’s approach to digital finance is specific and includes several items dealing with such issues as regulating the crypto-assets, the digital euro, digital operational resilience and access to financial data.
Background: the EU digital finance
Generally, the digital finance is the term used to describe the impact of new technologies on the financial services industry. It includes a variety of products, applications, processes and business models that have transformed the traditional way of providing banking and financial services. While in principle, the technological innovation in financial sector is not particularly new, investment in new technologies has substantially increased in recent years and the pace of innovation has been exponential.
Presently, numerous new financial technologies (fintech) can facilitate access to financial services and improve the efficiency of the financial system.
Both people and business actively interact with banks using mobile technology to make payments, transfer money and make investments using a variety of new tools that were not known just a few years ago. Artificial intelligence, social networks, machine learning, mobile applications, distributed ledger technology, cloud computing and big data analytics have given rise to new services and business models by established financial institutions and new market entrants.
All these technologies can benefit both consumers and companies by enabling greater access to financial services, offering wider choice and increasing efficiency of operations. They can also contribute to bringing down national barriers and spurring competition in areas such as: – online banking, online payment and transfer services; – peer-to-peer lending, -as well as providing personal investment advice and services.
The financial services industry has been influenced by innovative technology, which can benefit both consumers and companies by giving a greater access to financial services, offering wider choice and increasing efficiency of operations. Numerous opportunities involve also risks and challenges, which require monitoring and regulation. Therefore, the Commission has put further many initiatives to embrace the innovations, preserve market stability and integrity, and protect financial investors as well as consumers.
Source and citations from: https://finance.ec.europa.eu/digital-finance/overview-digital-finance_en
Following up on the EU-wide digital finance strategy, the Commission established a platform aimed at supporting innovation in finance and building a true single market for digital financial services. The Data Hub will make available to participating firms specific sets of non-public, non-personal data, with a view to enable them to test innovative products and train AI/ML models. The initiative is part of the European strategy for data from 2020 through which the EU commits to boosting the development of trustworthy data-sharing systems.
Source: https://digital-finance-platform.ec.europa.eu/data-hub. And the EU strategy for data in:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0066
Crypto-assets
It is an EU-wide and rather comprehensive framework for crypto-assets and related services to ensure that the financial services among the EU member states fit for the digital age. Modern digitalisation process is transforming global and regional financial markets, including that of the EU-27; the process can lead to innovative new products, services, applications and business models. Digital finance has a key role to play in shaping a more competitive, sustainable, resilient economy with a more inclusive, modern and prosperous societies. A crypto-asset is a digital representation of value or a right that can be transferred or stored electronically using distributed ledger technology or similar technology.
Crypto assets are a digital innovation that can streamline capital-raising processes, enhance competition and create an innovative and inclusive way of financing for consumers and SMEs. Crypto-assets can also be used as a means of payment and can present opportunities in terms of cheaper, faster and more efficient payments, in particular on a cross-border basis, although by limiting intermediaries.
In accordance with the 2020 digital finance strategy, the EU adopted a comprehensive legislative framework that regulates the issuing of crypto assets as well as the services provided in respect of crypto-assets. The Regulation on the Markets in Crypto-Assets (MiCA) covers the crypto-assets and related services and activities that are not covered by other Union legislative acts on financial services.
On MiCA regulation (May 2023; the states shall adopt by the end of 2024, the laws, regulations and administrative provisions necessary to comply with the regulations) in:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32023R1114
The MiCA framework intends to address the following key risks which have appeared in recent crypto asset market:
= prospective customers and holders of crypto-assets should be informed about the characteristics, functions, and risks of crypto-assets they intend to purchase;
= to ensure market integrity and reduce the risks of fraud, MiCA introduces organizational, operational and prudential requirements for issuers of crypto assets and crypto asset service providers, such as trading venues or wallets;
= to prevent market manipulation and insider trading (market abuse), MiCA provides specific rules aiming at avoiding hacks and bugs in the blockchain, requiring the establishment of adequate IT security procedures and systems in place to guard against cyber risks and IT failures;
= to ensure that risks of money laundering, terrorist financing and sanctions circumvention are mitigated, crypto asset service providers covered by MiCA are included in the list of “obliged entities” under the anti-money laundering framework (AML) and shall comply with the AML/CTF regulatory framework.
More on AML in: https://finance.ec.europa.eu/financial-crime_en
This dedicated and harmonised framework for markets in crypto-assets will support innovation, provide for the proportionate treatment of issuers of crypto-assets and crypto asset service providers to scale up their business cross borders, as well as provide significant benefits in terms of cheaper, faster and safer financial services and asset management.
References to: https://finance.ec.europa.eu/digital-finance/crypto-assets_en
Digital euro
Among numerous issues concerning the digital euro and the legal tender of cash, the Commission explains that the digital euro is a digital form of central bank money that would offer greater choice to consumers and businesses in situations where physical cash cannot be used. The digital euro would be a complement to cash, which would remain widely available and useable.
In the context of the EU’s digital transition, the digital euro could support the EU’s digital finance and retail payments strategies described above, thanks to its potential as an additional, innovative and safe means of payment.
Furthermore, the digital euro could ensure that central bank money – in both its physical and future digital form – is widely available to and accepted by users in the euro area, that it promotes accessibility and financial inclusion, and is tailored to user’s’ needs, while preserving financial stability. The digital euro could also facilitate the development of pan-European and interoperable retail payment solutions, as well as promote efficiency, innovation and resilience in the EU’s digitalizing economy.
Besides, the digital euro could strengthen the international role of the euro and support the EU’s open strategic autonomy.
On strategic autonomy in: https://finance.ec.europa.eu/publications/communication-european-economic-and-financial-system-fostering-openness-strength-and-resilience_en
In June 2023, the European Commission adopted a legislative proposal on the legal tender of euro banknotes and coins, to safeguard the role of Euro cash, which must be accepted as a means of payment everywhere in the EU and accessible for citizens and businesses. This proposal codifies and clarifies the judgment by the European Court of Justice in January 2021 which sets out the principles of euro banknotes as a legal tender, as well as the Union’s exclusive competence in the area of monetary policy (i.e. for states the currency of which is the euro) .
On Court judgment in: https://curia.europa.eu/juris/documents.jsf?num=C-422/19 and in: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:62019CJ0422
In view of the establishment and potential issuance by the ECB of a digital euro with legal tender status, it is also important to regulate the meaning of legal tender for the existing physical form of the euro to ensure consistency among the two forms of public money. In addition, this proposal seeks to address issues concerning the acceptance of cash that have emerged, which can lead to difficulties for citizens wanting to pay in cash, as well as concerns which have been raised in a number of Member States about difficulties in accessing cash, such as closures of ATMs and bank branches.
The main objective of the proposal is to safeguard euro cash as a means of payment, so that people will continue to be able to use it for their payments if they so wish. Indeed, although the use of cash has declined, the 2022 ECB SPACE study confirms that it still represents 59% of the number of retail payment transactions and 42% of the value of these transactions; about 60% of European consumers consider it important to keep the option to pay by cash.
However, the proposal clarifies what legal tender means, and sets out the rules for the mandatory acceptance of euro cash and possible exceptions to it. In addition, it also sets out what the member states need to do in order to ensure that cash is widely accepted and that it can be easily accessed by its users.
More in: https://economy-finance.ec.europa.eu/euro/use-euro/euro-legal-tender_en#legislative-proposal-on-the-legal-tender-of-euro-banknotes-and-coins
Cyber resilience
This European framework on digital operational resilience focuses on managing the risks associated with the financial sector’s increased reliance on software and digital processes. The digital finance sector faces continuous and evolving cyber threats with ill-intentioned individuals constantly coming up with sophisticated techniques to exploit vulnerabilities and compromise the security of financial institutions, transactions, and sensitive customer data. The financial sector’s growing dependency on software and digital processes increases these risks.
Cyber resilience means being not only prepared for cyber threats, but also capable of withstanding and recovering from them, and adapting to ongoing risks.
The EU adopted a legislative framework in the form of a Regulation on Digital Operational Resilience (DORA, 2022), in order to strengthen companies’ ability to prevent incidents and also to minimize disruptions and ensure a swift recovery after ICT-related incidents. The framework also includes an oversight mechanism on service providers, such as Big Techs, which provide cloud computing services to financial institutions.
This initiative connects to a wider work stream ongoing at European and international level, aimed at strengthening cybersecurity in financial services and addressing broader operational risks.
Text on DORA in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022R2554
Framework for financial data access
The EU-wide “open finance” proposal establishes a framework for responsible access to individual and business customer data across a wide range of financial services. This framework places consumers’ interests, competition, security and trust at their centre. Thus, new providers enabled by digital technologies have entered the payment services market, in particular providing ‘open banking’ services. Broader ‘open finance’ solutions in areas beyond payments have also been developing, albeit at a slower pace in absence of clear rules of the game. Notably, such solutions are not always efficient and secure insofar as they involve data users accessing data through interfaces that data holders have put in place for their customers, resembling the way ‘open banking’ services were delivered prior to the revised Payment Services Directive.
In response to these market developments, the proposed framework seeks to ensure the EU’s financial sector is fit for purpose and adaptive to the digital transformation, and the risks and opportunities it presents – in particular for consumers.
Generally, a data breach occurs if confidential/personal/sensitive data gets exposed to unauthorized third parties; since 2004, about 18.5 billion accounts have been breached worldwide. By the end of 2024, the North America had the highest number of breached accounts – over 100 million; while this is a slight decrease from the beginning of the year, the North American accounts still make up a quarter share of those affected globally; in North America, the most breached country has been the US, responsible for the vast majority (93%) of breached North American accounts. Europe saw the second-highest number of breaches by the end of 2024 – about 88 million, an increase of over 70% from the beginning of the year; however, it is still about one-fifth of the global level. An additional 10% of the accounts originated from Asia (44mln); all other regions comprised less than 6% of the global total, and almost 39% remain unknown. In descending order, the ten most breached countries by the end of 2024 were the US (93.7mln), France (17.2 mln), Russia (16.5 mln), Germany (14.6 mln), Japan (9.7 mln), the UK (8.3mln), China (7.9 mln), Italy (7.8 mln), India (7.4 mln) and Brazil (5.1 mln).
Source: https://surfshark.com/research/data-breach-monitoring
European data access framework builds on the already existing “open banking” access to customer data held by account-servicing payment service providers and takes a customer-centric approach. It aims to ensure that all consumers and firms have effective control tools over their financial data. It provides additional tools to ensure personal data protection in line with the General Data Protection Regulation (GDPR) and applying the general principles of business-to-business data sharing in line with the data act proposal.
On GDPR in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02016R0679-20160504
The framework would establish clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts, including: – possibility but no obligation for customers to share their data with data users; – obligation for customer data holders to make these data available to data users; – full control by customers over who accesses their data and for what purpose; and – standardization of customer data and the required technical interfaces. As a part of the package proposed in June 2023, the first set of measures include amendments to modernise the payment services regime (PSD2) and to establish a Payment Services Regulation (PSR). These amendments will ensure consumers can continue to make electronic payments and transactions in a safe and secure manner, both nationally or cross-border, in euro and non-euro. While protecting their rights, they aim to provide greater choice of payment service providers on the market.
More on payment services in: https://finance.ec.europa.eu/consumer-finance-and-payments/payment-services/payment-services_en
A second set of measures is embodied in a legislative proposal for a framework for financial data access; this framework will establish clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts. In practice, this will lead to more innovative financial products and services for users and will stimulate competition in the financial sector.
See proposal for a regulation (June 2023) in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52023PC0360
Note. The digital currencies are entering numerous media to attract attention to the growing importance of crypto-currency: thus, a known crypto-platform Kraken has become an “exclusive partner” of RB Leipzig football team in Germany at the start of the 2023/24 season. This US digital company is represented on the sleeves of the Red Bulls’ shirts in Bundesliga games, as well as on the sleeves of the men’s first team’s training and warm-up tops. Kraken is one of the most renowned and well-known crypto providers worldwide. The company, based in San Francisco, is known for its high security standards and aims to introduce national and international football fans to the world of crypto-currencies through its partnership with RB Leipzig.