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    EC Proposes Frameworks for Crypto-Assets and Operational Resilience

    September 24, 2020

    EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience. The proposal for regulation on a pilot regime for market infrastructures based on distributed ledger technology and the proposal for a directive amending directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, EU 2015/2366, and EU/2016/2341 also form a part of the package. As of now, EC has published provisional texts of these legislative proposals, with the final proposal texts expected to be available soon. EC also published the frequently asked questions on this package, along with the impact assessment statements on the legislative proposals and the fact sheets on the digital finance and retail payments strategies.

    Digital Finance and Retail Payments Strategies

    The Digital Finance Strategy is aimed to tackle fragmentation in the Digital Single Market for financial sector, ensure that the regulatory framework of EU facilitates digital innovation, create a European financial data space to promote data-driven innovation (building on the European Data Strategy), and address challenges and risks associated with the digital transformation, particularly to promote resilience, data protection, and appropriate prudential supervision. The strategy aims to ensure that EU financial services rules are fit for the digital age, for applications such as artificial intelligence and blockchain. To achieve the objectives of this initiative, private stakeholders, national authorities, and the EU must work closely together. EC will work together with legislators and the supervisory community at both European and national levels. The EU member states and national supervisors should continue and expand their numerous innovative initiatives, amplifying their effects beyond national markets to encompass the EU single market. 

    The retail payments strategy aims to bring safe, fast, and reliable payment services to European citizens and businesses. It seeks to achieve a fully integrated retail payments system in EU, including instant cross-border payment solutions. This will facilitate payments in euro between EU and other jurisdictions. It will promote the emergence of home-grown and pan–European payment solutions.

    Legislative Proposals on Crypto-Assets

    EC is proposing a pilot regime for market infrastructures that trade and settle transactions in financial instruments in crypto-asset form. The pilot regime represents a "sandbox" approach—or controlled environment. The pilot regime, which allows for derogations from existing rules, will allow regulators to gain experience on the use of distributed ledger technology, or DLT, in market infrastructures and for companies to test out solutions utilizing distributed ledger technology. The intention is to allow companies to test and learn more about how existing rules fare in practice. This proposed regulation, among others, mandates ESMA to carry out a review on the application of the pilot regime three years after its entry into force. 

    EC is also proposing some related amendments where current legislation presents clear issues to the application of distributed ledger technology in market infrastructures. For other crypto-assets, EC is proposing a comprehensive framework that will protect consumers and the integrity of previously unregulated markets in crypto-assets. The framework will cover not only entities issuing crypto-assets but also all firms providing services around these crypto-assets such as firms that keep customers' crypto-assets in custody, crypto-asset exchanges, crypto-asset trading platforms, and many more. The framework also lays down requirements for the emerging category of so-called "stablecoins," which are divided into e-money tokens and asset-referenced tokens. These proposals take into account the outcome of the G7 report on stablecoins and the ongoing work from FSB on so-called "stablecoins."

    Legislative Proposals on Digital Operational Resilience 

    EC is proposing the Digital Operational Resilience Act, also called DORA, which will require all firms to ensure that they can withstand all types of Information and Communication Technology (ICT)-related disruptions and threats. The proposal also introduces an oversight framework for ICT providers such as cloud computing service providers. The proposal will, for the first time, bring rules addressing ICT risk in finance together into one single legislative act. It should fill in the gaps and address current inconsistencies in sectoral legislation. The proposal will put in place dedicated ICT risk management capabilities, reporting of major ICT-related incidents, digital operational resilience testing, management by financial entities of ICT third-party risk, oversight of critical ICT third-party service providers, and information-sharing among financial entities. The requirements will be applied in a proportionate manner to ensure that, while the new rules cover all financial entities, they are tailored to the risks and needs of specific entities as well as to their size and business profiles. The proposal covers a broad range of financial entities—from credit institutions and investment funds to crypto-asset service providers. The proposal will be subject to the agreement with the co-legislators, the European Parliament, and the Council.

     

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    Keywords: Europe, EU, Banking, Insurance, Securities, Fintech, Digital Finance Strategy, Operational Risk, Blockchain, Regtech, Crypto Assets, Cloud Computing, ICT Risk, Digital Operational Resilience Act, Third-Party Arrangements, EC

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