On the 24th of September 2020, the European Commission adopted a Digital Finance Package, which includes a digital finance strategy, together with three legislative proposals on Digital Operational Resilience Act (“DORA”), Markets in Crypto-Assets (“MiCA”), and a Pilot Regime for Market Infrastructures based on Distributed Ledger Technology (“DLT”).
In addition to the above, the Digital Finance Package brings with it a proposal for a directive amending certain European Union (“EU”) rules regarding financial services. Furthermore, in addition to the Digital Finance Package, the Commission also adopted a retail payments strategy to enhance and develop different payment solutions.
The Digital Finance Strategy
The Digital Finance Strategy adopted by the Commission sets out four key strategic priorities for the development of digital finance from 2020 to 2024. The four key priorities of the strategy are:
- Removing fragmentation in the Digital Single Market, in order to facilitate cross-border activities of financial entities, and also ensuring effective services for clients. In particular, the Commission intends to propose a harmonised set of rules with regard to client onboarding;
- Adapting the EU regulatory framework in order to facilitate digital innovation, in particular to ensure the responsible use of financial innovation utilising artificial intelligence;
- Establishing a common financial data space by promoting data-driven innovation in finance; and
- Addressing the challenges and risks associated with digital transformation.
The Digital Operational Resilience Act
DORA, which is a proposal for a Regulation on digital operational resilience for the financial sector, aims to improve Information Communication Technology (“ICT”) risk management in finance. This piece of legislation is the first attempt in harmonising requirements on ICT-risk management throughout the EU. In fact, DORA covers and applies to all financial actors, including critical third-party ICT Providers. Some of the key requirements under DORA are the following:
- ICT Risk Management;
- Classification and Reporting of incidents related to ICT, in order to monitor, handle and follow-up on these incidents;
- Implementing a proportional and risk-based Digital Operational Resilience Testing Programme; and
- Information and Intelligence Sharing between Financial Entities, in order to enhance the digital operational resilience of financial entities.
The Pilot Regime for Market Infrastructures based on DLT
A regulation on a Pilot Regime for Market Infrastructures based on DLT was published on the Official Journal of the EU on the 22nd of June 2022. This regulation will become applicable as from the 23rd of March 2023, except for certain provisions which became applicable with the regulation’s publication on the Official Journal.
Since existing financial services legislation were not designed with DLT and crypto assets in mind, to the extent that certain provisions possibly preclude and/or limit the use of DLT in the issuance, trading, and settlement of crypto assets qualifying as financial instruments. Furthermore, there are certain regulatory gaps as a consequence of legal, technological, and operational requirements related to the use of DLT.
Therefore, the proposed regulation provides a legal framework regulating the trade and settlement of transactions in crypto assets qualifying as financial instruments as per the Markets in Financial Instruments Directive (“MiFID II”), whilst those which do not qualify as such fall within the MiCA Regulation. The DLT Pilot Regulation aims to create aregime for market infrastructures based on DLT, in order to test DLT market infrastructures.
We invite you to contact us for further information on the MiCA Proposal and the other regulatory developments in the DLT industry.