Although much of my recent attention has been drawn by UK fintech week and the Kalifa review, this has been a great month or so to be interested in EU fintech developments as well. I've summarised some of these below, covering:
- European Insurance and Occupational Pensions Authority (EIOPA) discussion paper on the use of DLT and smart contracts in insurance;
- European Central Bank (ECB) Advisory Groups on Market Infrastructures for Securities and Collateral and for Payments report on the use of distributed ledger technology (DLT) in post-trade processes;
- ECB blog post on a digital Euro;
- draft legislative proposal on artificial intelligence.
EIOPA discussion paper on DLT and smart contracts in insurance
EIOPA recently published a discussion paper, aimed at providing a high-level overview of risks and benefits of blockchain and smart contracts in insurance from supervisory perspective, as well as to give an overview of the findings of feedback received from national competent authorities (NCAs). Most of the paper is a (really helpful) description of DLT, smart contracts and potential usecases in insurance, but the new area for me was that EIOPA looked at use of cryptoassets in insurance.
EIOPA identified that one possible use of cryptoassets in insurance is the investment in cryptoassets, either directly by purchasing cryptoassets as an investment, or indirectly by investing in financial instruments with cryptoassets as underlying assets. Very few European insurance undertakings already count with such types of investments.
Further, only one NCA reported that an insurance undertaking in its jurisdiction allowed customers to pay insurance premia or receive loss refunds with cryptoassets. In several jurisdictions, this is not possible since there are legal requirements requiring payments to be made in legal tender. However, EIOPA noted that in other jurisdictions such payments would be possible where there is no specific provision against it.
ECB advisory group report on use of DLT in post-trade
The ECB has published a report by the Advisory Group on Market Infrastructures for Securities and Collateral, which has been investigating the use of DLT in securities post-trade processes. The report is a thorough review of the existing landscape, covering regulatory, governance and interoperability, and the key implications of using DLT at different stages of the securities life cycle, from issuance to custody and settlement.
The focus is on current use cases for equities and bonds, and the report describes different types of securities issuance and post-trade processes. These are categorised according to different “models” depending on how DLT is used in each instance. The description of the models is particularly interesting:
- Model 1 where securities are issued as native digital assets. That is, the securities do not have any other representation outside the relevant DLT network: the ledger where the assets are recorded constitutes by itself the only bookkeeping system;
- Model 2 is where securities are issued in the "traditional" way and made available on a distributed ledger by either migrating, linking or tokenising them via DLT. The report sets out different types of Model 2 (e.g., Model 2a being securities recorded in a conventional system and fully migrated to a DLT-based one (without the issuance of a token)).
Model 1 is the most revolutionary, and most difficult to achieve as it is more likely to depend on there being an appropriate regulatory framework. The report notes that most EU countries do not have a regulatory basis for the issuance of native digital assets and for tokenisation, although certain jurisdictions (France, Luxembourg, Italy and Germany) have either already tried to address this or have proposals underway - my colleagues in Frankfurt have published a post on the German proposals here.
The report is particularly timely given the very recent announcement by the European Investment Bank which has recently issued a bond in the form of a digitally native token. Post-trade has long been one of the most exciting potential usecases for DLT and I look forward to this area continuing to be in focus.
ECB blog post on digital euro
A blog post was published in March 2021 by Fabio Panetta, member of the ECB's executive board, and Ulrich Bindseil, Director General Market Infrastructure and Payments, originally an opinion piece in the Frankfurter Allgemeine Zeitung. Usually I'd treat opinion pieces with a bit of a pinch of salt, but given the authors and that this comes some time after the ECB's October 2020 report on a digital euro, this one seemed worth a look, especially given it was intended to clear up what were termed "misconceptions" about the digital euro.
Of course, as with many central banks (including the UK and its "Britcoin"), no decisions have been made about whether to introduce a digital currency (I saw a slightly tongue-in-cheek tweet which summed up what I've seen from central banks over the last 6 years or so!) and the ECB's position continues to be exploratory. However, there were some interesting points made in the post:
- later this year, the ECB’s Governing Council will decide whether or not the ECB should launch a project to get ready to issue a digital euro. So, even if that decision is positive, still no digital euro in the very near-term;
- the ECB is worried about the stability risks if it does not offer a digital currency. The blog post noted that: "We must avoid a situation in which European payments are dominated by non-European providers, including by foreign tech giants potentially offering artificial currencies in the future. Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power";
- there are no plans to abolish cash or to disintermediate the banks.
Draft AI regulation
My colleagues have already written an in-depth article about the Commission's legislative proposal on artificial intelligence, which is well worth a read. I would only add that given the breadth of the scope, this looks like it could affect fintech businesses, as well as incumbent institutions and note that the draft regulation expressly refers to financial services' authorities which are currently responsible for the supervision and enforcement of the financial services legislation (including the ECB) should be designated as competent authorities for the purpose of the AI regulation. So financial institutions probably won't need to worry about a new regulator, but should be aware of this potential new regulation nonetheless.
Central to all our discussions is the fact that a digital euro would be a means of payment that would complement cash, not replace it. Abolishing cash is not on the table, as ECB President Christine Lagarde and other members of the ECB Board and Governing Council have stated publicly on several occasions. Moreover, banknotes are legal tender under European primary law. And the ECB and the European Commission have both pledged support for the continued use of cash at the point of sale.