A step forward in regulating crypto assets

The introduction of a harmonised regime to regulate cryptos in accordance to the Digital Finance Package by the EU Commission complies with a long-awaited and necessary initiative. While crypto assets indeed represent new opportunities, like anything else, they also come with significant risks resulting from a lack of regulation or legal uncertainties. Therefore, the third proposal in the Digital Finance Package by the EU Commission provides, for the first time, fully harmonised crypto-asset guidelines that currently fall outside of EU financial services legislation. This also including e-money tokens.

The framework is prepared in the hopes to provide legal clarity for crypto-asset issuance and service providers. The proposal includes four broad and intertwined goals. The primary goal is to ensure legal certainty. A robust legal framework is required for crypto-asset markets to operate in the EU, clearly outlining the regulatory status of any crypto assets that are not covered by existing financial services laws. The second goal is to encourage innovation. It is vital to provide a safe and appropriate framework to enable innovation and fair competition to foster the development of crypto-assets and the wider usage of DLT. The third goal is to establish adequate levels of consumer and investor protection as well as market integrity, given that crypto assets are subject to many of the same risks as more well-known financial products and are not covered by existing financial services regulation. The fourth objective is to ensure financial stability.

The proposal also lays out the requirements for stable coins. According to the proposal, there are different types of stable coins, and they are divided by e-money tokens and asset reference tokens. Stable coins may threaten financial stability, and thus they are subject to more stringent rules and more specific supervision.

Stable coins, which are a relatively new subset of crypto-assets – have recently emerged and attracted the attention of both the public and regulators around the world. While the crypto-asset market is still small and does not now constitute a danger to financial stability, this may change with the development of ‘global stablecoins,’ which aim for broader acceptance by including features targeted at stabilizing their value and using the network effects created by the corporations that promote these assets.

The Digital Finance Package also includes:

• A proposal for a pilot regime on distributed ledger technology (DLT) market infrastructures,
• a proposal for digital operational resilience,
• and a proposal to clarify or modify certain associated EU financial services legislation

One of the strategy’s identified priority areas is ensuring that the EU financial services regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies. This proposal, together with the proposal on a DLT pilot regime, represents the first concrete action within this area. Crypto assets are one of the major applications of blockchain technology in finance.The EU wants to set up a so-called sandbox that lets financial technology companies experiment with crypto assets. The sandbox allows companies to test new products in a live environment with legal authorisation.

The strategy is a step forward in complying with the Commission’s aims of preparing Europe for the digital era and creating a future-ready economy for the people. The digital finance package contains a new digital finance strategy for the EU financial industry, with the goal of ensuring that the EU embraces and leads the digital revolution, with innovative European companies at the forefront, making the benefits of digital finance available to European consumers and businesses.