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The EU-wide specific financial framework, i.e. the capital markets union, has been at the heart of the Commission’s ambition in boosting growth, supporting innovation and promoting European global competitiveness. The EU financial sector has the potential to multiply sustainable finance and become a global leader in this area. The sector is having also a positive effect on economic growth and job creation: new trend in digital finances are part of this ambition.
Background
The capital markets union, CMU supporting goals is the intention to connect finance with the needs of the European economy, sustainable development agenda and the EU-wide twin transition, i.e. digital and green. However, a stumbling block in the process is financial availability and investment.
Existing spectrum of European investment perspectives are closely connected to the region’s socio-economic security. The EU’s efforts in combating global challenges are including active support through direct and indirect investments to support all forms of entrepreneurship, specifically venture capital funds active in the four main digital technology spheres within the broad EU-wide economic security strategy: a) advanced semiconductors, b) artificial Intelligence, c) quantum technologies and d) biotechnologies.
Basically, economic security, at least in theory, is about preventing negative socio-economic outcomes, reducing unwanted dependencies, lowering volatility and strengthening national recovery/resilience.
Reference to: Communication on European Economic Security Strategy, European
Commission and the High Representative for Foreign Affairs and Security
Policy (2023), at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52023JC0020 .
As to the “investment climate” around the world (statistics from 2023), the EU is at the level of about $ 46 bn (on par with China and “the rest of the world”), whereas it is about $120 bn in the US. Advancements in AI have dominated in Europe compared to the US: presently, the EU has about 108,000 AI operators versus 87,000 in the US. The AI becomes number one theme at “seed stage”, including Mistral AI securing the largest seed round in European history: thus, AI-focused companies made up 22% of all European entrepreneurship in 2023 (surpassing the levels of the previous year); it indicates stronger investors’ appetite to fund the digital sector.
More than 60% of European investors plan to increase their productivity by automating internally manual and repetitive tasks; almost 45% plan to leverage AI to accelerate their market research and due diligence.
The AI is not the only sector that the EU prioritizes: the “carbon-energy” sector, which includes the so-called “climate-tech” (as well as clean energy, storage and energy efficiency) accounts for 30 percent of all capital invested in European digital technology in 2023, tripling its share of total investment since 2021. This made it the single largest sector by capital raised, overtaking both fintech and software.
Europe has acquired a forefront place in AI ethics and regulation amid the breakthrough of large language models, LLMs; in a world where technological innovation is driven by competition, it is essential to establish regulatory frameworks that promote ethics and safety. Europe has already taken the lead in tackling societal challenges in the field of AI and technology, potentially setting the global standard for the present century.
Citations and more in the “State of the European Tech Report- 2023”, in: https://stateofeuropeantech.com/executive-summary#C1-0-global-phenomenon.
Regulatory means in financial services
Financial services in the EU are the CMU’s building blocks and are subject to at least six “executive frameworks” operated by the Commission’s institutions and agencies. First, regulation, supervision and enforcement: the EU has introduced a specific regulatory process for financial services. The EU’s supervisory architecture consists of three authorities and a board to monitor systemic risks. Specific regulatory process in financial services was first introduced in 2001, when the EU endorsed the proposals and recommended the adoption of a new approach to improve the regulatory process in financial services in order to make it quicker and more effective. Following the financial crisis, the EU reformed its framework for financial supervision and established a new European Systemic Risk Board, ESRB for monitoring macro-prudential risks and transformed previous committees into independent authorities with enhanced powers. Three EU-wide supervisory authorities appeared since 2010, the so-called ESAs (which started operation from January 2011): a) the European Banking Authority, EBA; b) the European Securities and Markets Authority, ESMA, and c) the European Insurance and Occupational Pensions Authority, EIOPA.
More on EU’s economy and CMU in: https://www.integrin.dk/2024/07/19/european-economy-and-euro zone-challenges-abound/
On 18 April 2019, the European Parliament endorsed the legislation setting the building blocks of a capital markets union, including the review of the ESFS.
The following are the main regulatory instruments adopted recently:
= In December 2019, the European Parliament and the Council signed Regulation 2019/2175, which reviews the powers, governance and funding of the ESAs. The regulation gives new powers to EIOPA, EBA and ESMA.
More in: https://ec.europa.eu/commission/presscorner/detail/en/IP_19_2130.
Also at that time, EU co-legislators adopted a Directive 2019/2177, which amended the Solvency II Directive, the MiFID II Directive and the 4th Anti-Money Laundering Directive.
Also as part of the ESFS review, Regulation 2019/2176 from December 2019 amended the Regulation establishing the European Systemic Risk Board.
= In March 2021, the Commission launched a targeted consultation on the supervisory convergence and the single rulebook aiming at taking stock of the framework for supervising European capital markets, banks, insurers and pension funds.
= In May 2022, the Commission published a report on the operation of the European Supervisory Authorities, ESAs taking into account the results of the public consultation launched in 2021. The report assesses the ESAs´ tasks activities and follows up on the Commission´s commitment in the 2020 CMA action plan to monitor progress towards supervisory convergence.
References to: https://finance.ec.europa.eu/regulation-and-supervision/european-system-financial-supervision_en
Capital markets union and financial markets
The capital markets union creates a more integrated capital market in the EU, and a more diversified financial system, unlocking capital in Europe. The following are main regulatory facilities in the EU financial markets: = Credit Rating Agencies Regulation (CRA) – 1060/2009/; = Capital Market Recovery Directive – 2021/338/; = European Crowdfunding Service Providers for Business Regulation – 2020/1503/; = Investment Firms Directive (IFD) – 2019/2034/; and = Investment Firms Regulation (IFR)- 2019/2033/, etc.
As to investment funds, the following legal means are vital: = Cross-Border Distribution of Investment Funds Directive – 2019/1160/; = Cross-Border Distribution of Investment Funds Regulation – 2019/1156/; = Alternative Investment Fund Managers Directive (AIFMD) – 2011/61/; = European Long-Term Investment Funds Regulation (ELTIF) – 2015/760/; and = EU 2023 European Long-Term Investment Funds Regulation (ELTIF) – 2023/606/; = European Social Entrepreneurship Funds Regulation (EuSEF) – 346/2013/; = European Venture Capital Funds Regulation (EuVECA) – 345/2013/; = Money Market Funds Regulation (MMF) – 2017/1131/; and =Undertakings for Collective Investment in Transferable Securities Directive (UCITS) – 2009/65/, etc.
The following are the main CMU’s directions:
= Banking and insurance. EU rules on the activities and supervision of EU banks, insurance companies and pension funds, and how to strengthen their resilience to possible shocks and ensure their orderly exit from the market when needed.
= Sustainable finances. The EU is examining how to make sustainability considerations an integral part of its financial policy in order to support the European green deal
= Digital finance. New financial technologies can facilitate access to financial services and improve the efficiency of the financial system.
= Consumer finances and payments. Consumers should be able to make well-informed decisions on financial matters and feel confident that they are well protected if something goes wrong.
Digital finance: composition
Digital finance in the EU is surrounded by numerous new financial technologies that are supposed to facilitate access to financial services and improve the efficiency of the EU-wide financial system. Among four EU’s basic freedoms, the “capital movement” is regarded as an extremely vital component in the European integration.
New financial technologies can facilitate access to financial services and improve the efficiency of the financial system.
Crypto-assets represent a comprehensive framework for crypto-assets and related services to ensure that the EU-wide financial services are fit for the digital age.
Digital finance & euro
The digital euro would be a ‘central bank digital currency’ issued by the European Central Bank and available to the general public. It would be exactly like cash, just in a digital version. Like cash, each digital euro held by consumers would be directly backed by the European Central Bank: it would be distributed to citizens and businesses by banks and other payment service providers.
Unlike crypto-assets, the digital euro would be central bank money. The European Central Bank would guarantee that: a) it is safe, b) it keeps a stable value, and c) it can be exchanged at face value for euro cash. By contrast, crypto-assets can fluctuate significantly in value and their exchange into euro cash or even commercial bank money cannot be guaranteed. The euro has been a symbol of Europe’s unity and strength since its inception 25 years ago.
The digital euro, as a digital form of central bank money, 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 used. 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 present physical and digital form in future) is already widely available to and accepted by users in the euro area: the process 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. Finally, the digital euro could strengthen the international role of the euro and support the EU’s open strategic autonomy.
Source: https://finance.ec.europa.eu/digital-finance/digital-euro_en
While cash is still prevalent and will remain widely accessible and accepted, more and more citizens and businesses choose to pay electronically. In this context, the digital euro has several objectives:
= To ensure that people, businesses and public entities continue to have access to a public form of digital money for payments, which is accessible and accepted everywhere in the euro area, at any time (as opposed to only relying on private solutions);
= To make available such forms of digital money which would ensures the same level of privacy as cash (unlike existing digital payments solutions), and would be accessible to all citizens, including those without bank accounts;
= To promote innovation and competition in retail payments, including by enabling banks and other payment providers to develop new solutions for their customers; and
= To support Europe’s open strategic autonomy and reinforce the international role of the euro.
Many central banks around the world are currently exploring the issuance of central bank digital currencies, and a growing number of countries have already issued such currencies. For example, stable coins and other crypto-assets not denominated in euro, but widely used for payments, could also undermine the stability of the European monetary system. It is therefore important to establish a digital form of the euro to ensure that people, businesses and public entities continue to have access to a public form of money in euro which is accessible and accepted everywhere in the euro area and at any time. The digital euro would also make it easier for people to pay throughout the euro area: it would bring a cash-like experience to digital payments by allowing users to pay and transfer money with a high degree of privacy, and unlike many other digital payment solutions, even without an internet connection.
Digital payments
The digital euro would be a single means of payment usable throughout the euro area (i.e. presently in 20 EU states), regardless of where payers are located and which commercial bank or payment service provider they use. Users will be able to pay anytime, everywhere across the euro area, and payments will be sent and received instantly 24/7, 365 days a year; however, presently not all private digital solutions work seamlessly across the EU.
More in: https://finance.ec.europa.eu/digital-finance/digital-euro_en
Some other digital payment aspects shall be mentioned too:
= Possibility to pay digitally even without access to the internet: The digital euro could be used to send money for payments, even in the absence of an internet connection, if you are physically close to the other party of the transaction, whether another person or a shop (so-called “offline digital euro”). Consumers, businesses, and public entities would be able to make and receive payments even in remote areas with unreliable internet connection, and in case of a shortage of communication networks or power infrastructures.
= More choice for consumers: The digital euro would complement existing private digital payment solutions. It brings more choice to consumers, who would be able to choose among all available payment solutions depending on their needs, preferences and circumstances.
= Possibility to pay digitally even if you do not have a bank account: the digital euro would foster digital and financial inclusion, thereby contributing to cutting the digital divide by allowing individuals without bank accounts to make or receive digital payments, and to access basic functionalities free of charge. Such functionalities would include converting cash into digital euro and vice versa.
= Enhanced privacy for users: The digital euro would enable users to make digital payments while ensuring their data is protected. When using the digital euro offline, the privacy of the user is the same as when they use cash.
Digital euro: executive aspects
As a rule, all drafts from the Commission have to be debated and adopted by two co-legislators (the European Parliament and the Council); once a regulation establishing the digital euro is adopted by the co-legislators, the European Central Bank may decide to issue a digital euro in line with its mandate and tasks. The decision to issue the digital euro falls within the sole competence of the European Central Bank, acting in full independence, in accordance with the Treaties’ provisions.
The European Central Bank would conduct a preparation phase before deciding whether, when and for which maximum amount a digital euro should be issued.
Such regulation will be subject to the ordinary legislative procedure, which means that both the European Parliament and the Council must consider, amend and adopt it before it enters into force. Once the regulation enters into force, all EU member states in the euro area will be required to monitor acceptance of and access to cash in their territory, to report the results of their assessment annually to the Commission and the European Central Bank and to take remedial measures if necessary.
More the digital euro and the legal tender of cash in: https://finance.ec.europa.eu/digital-finance/digital-euro/frequently-asked-questions-digital-euro-and-legal-tender-cash_en
In the digital finance, the following main regulations have been adopted: = Digital Operational Resilience Regulation (DORA) – 2022/2554/; = Markets in Crypto-assets Regulation (MiCA) – 2023/1114/; and = Pilot Regime for Market Infrastructures Based on Distributed Ledger Technology Regulation (DLT Pilot Regulation) – 2022/858/.
Reference to: https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/overview-financial-services-legislation_en
Cyber resilience: European Payments Initiative
The framework on digital operational resilience focuses on managing the risks associated with the financial sector relying more on software and digital processes. In the framework for financial data access, the “open finance” proposal establishes a perspective access to individual and business customer data across a wide range of financial services.
For example, the European Payments Initiative, EPI was initially meant to develop joint payments frameworks rather than searching for a balancing instrument in interoperability of heterogeneous domestic solutions. However, the EPI has been under severe scrutiny since the opt-out of several European banks. The EPI could still play a vital role in stimulating EU’s payment system and help diminish the market fragmentation.
Although the concerns about any feasible solutions are numerous, the future of the autonomous Eurozone payment infrastructure is still doubtful: the diminished capacity of the initiative might be a blessing in disguise as the project scope can be adjusted, helping grow and empower the European Payments system.
Innovation in the European payments industry is a focal point of EPI, contra to focusing on Visa and MasterCard dominance in Europe and searching for an ‘antidote’ solution; with certain adjustment, EPI can achieve its desired goal of increased payment homogeneity in the EU by supporting and growing already existing financial systems, instead of focusing on a search for one magic bullet, argued experts in Local Payment Methods of fintech Nikulipe.
Reference to: https://nikulipe.com/
Note: Nikulipe is a Fintech company that facilitates Emerging and Fast-Growing market access for Fintechs, Payment Service Providers, and their merchants by streamlining cross-border payment solutions. Established in 2019, Nikulipe was founded by serial entrepreneurs and Unicorn Founders, who have vast experience in the Fintech-industry, with direct expertise in payment industry technology and business development.
https://www.integrin.dk/2022/07/16/european-payments-initiative-learning-from-previous-mistakes/
Financial law enforcement
In banking and financial law enforcement, there are two main aspects: 1) monitoring of banking and finance directives (the European Commission is monitoring a proper transposition of EU directives in the member states), and 2) monitoring free movement of capital (the Commission monitors the application by the member states EU Treaty provisions on free movement of capital).
As to the first, the EU’s financial reform includes a significant number of directives: the member states have to transpose them into national law and communicate the adopted measures to the Commission. The Commission verifies if transpositions are correct and complete, and takes action if necessary to ensure proper transposition; in this way the Commission monitors and enforces the EU-wide financial legislation. Besides, the Commission supports EU states in the transposition process and monitors the adoption of the national measures required.
More on the issue in: https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/enforcement-and-infringements-banking-and-finance-law/monitoring-banking-and-finance-directives_en
As to the second, it is vital to mention that the principle of free movement of capital applies directly to the laws of the EU member states. The enforcement activity of the European Commission in this area mainly focuses on monitoring capital flows and ensuring that EU countries properly apply the rules of the Treaty. Thus, the Commission analyses restrictions to the free movement of capital and acts to eliminate any barriers that are incompatible with the EU Treaties; it done through dialogue with EU countries or by pursuing infringement cases. Every year, the Commission publishes working documents that describe the developments on capital movements and investment flows across the EU states. These documents often build on the results of external studies that provide in-depth analysis of investment flows within the EU and in the context of the global economy.
On infringement cases and procedures in: https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/enforcement-and-infringements-banking-and-finance-law/infringements_en
Latest infringement cases in: https://www.integrin.dk/2024/06/03/infringement-decisions-in-europe-complying-with-the-unions-law/