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Blockchain regulatory sandbox launched by European Commission

Blockchain projects in Europe: the Commission is also supporting the European Blockchain Services Infrastructure (EBSI), which aims to put blockchain to use for the public good | Credit: Gerd Altmann; Pixabay

A regulatory sandbox for projects with potential to become ‘innovative use cases’ involving distributed-ledger technologies (DLT) has been launched by the European Commission.

The ‘European Blockchain Sandbox’ is looking to facilitate cross-border dialogue between regulators across Europe and companies or public authorities in order to give a boost to blockchain-based public spirited initiatives. Sandboxes – quasi-real-world test spaces for nascent innovative projects – are typically set up by regulatory authorities as ongoing initiatives, but this sandbox has an intended lifespan of just three years.

The sandbox will support up to 20 private-sector projects during each annual cohort – so, up to 60 private-sector projects during its intended lifespan – as well as use cases for deployment by public authorities using the European Blockchain Services Infrastructure (EBSI). EBSI, which aims to put blockchain to use for the public good, is backed by the Commission and the European Blockchain Partnership. The latter comprises the 27 European Union (EU) member states, plus Norway and Liechtenstein, and was created in 2018.

Companies and public entities behind projects that are beyond proof-of-concept stage and ‘already close-to-market or at an early stage of being operational’ can attempt to get into the sandbox. Projects will be chosen through calls for expressions of interest, with the first ‘call’ open until 14 April. The selection process will be overseen by a panel of independent academics. The ‘most innovative’ regulator participating in the sandbox each year will win a prize.

The sandbox, which is being funded through the EU’s Digital Europe Programme, is being run by a consortium led by international law firm Bird & Bird and its consulting arm OXYGY (project management and selection). Bird & Bird/OXYGY are working alongside Netherlands-headquartered ‘decentralised economy’ consultancy WBNoDE (technical experts and use case selection) and Italy-headquartered web design firm Spindox. The consortium emerged triumphant from a €2.8m (about £2.5m) tender process that ran from March to May 2022.

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Sandboxes on the rise

DLT including blockchain have wider use beyond financial services, the European Commission’s announcement of the European Blockchain Sandbox points out. Examples include DLT being used to help public-sector authorities fight counterfeit in global supply chains and protect verifiable credentials, such as education certificates, against fraud.

‘While pilots have shown a significant potential of DLT across industry sectors, legal uncertainty prevails as governance remains shared between many actors,’ the Commission notes. ‘To increase legal certainty, there is a need for an enhanced dialogue between regulators and innovators. The European Blockchain Regulatory Sandbox addresses this need by offering a trusted environment for regulators and providers of DLT technologies to engage.’

joint-European Supervisory Authorities (ESAs) report on regulatory sandboxes and innovation hubs, published three years ago, identified a need for action to promote better co-ordination and co-operation between authorities to help fintech growth.

But at an online event in April 2022 to launch the EU Digital Finance Platform, the European Digital Finance Association’s Maria Staszkiewicz suggested that the growing number of EU-backed sandboxes could leave companies uncertain which regimes or procedures to follow. She specifically referred to the blockchain sandbox, as well as the Commission’s artificial intelligence (AI) act proposal (unveiled one year previously), which pushes for AI sandboxes.

The Commission’s announcement of the blockchain sandbox’s launch states that it will ‘co-operate with other relevant sandboxing frameworks, in particular the EU Digital Finance Platform and the AI sandboxes once established under the [EU’s] AI Act’, adding that ‘this collaboration is of pivotal importance given the increasing convergence of innovative technologies in use cases often involving several industry sectors.’ The AI Act is currently being discussed by MEPs.

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EU digital ID wallet – latest

In a separate fintech-related development at EU level, the European Commission has announced progress towards the introduction of an EU-wide ‘digital wallet’ – a personal digital wallet for citizens and residents across the bloc’s member states.

The Commission presented plans for a digital wallet in June 2021, saying it would create a ‘common toolbox’ including technical architecture, standards and guidelines for best practices. It has now published a 42-page ‘European Digital Identity Wallet Architecture and Reference Framework – Version 1.0’.

The ‘EUDI Wallet is being developed to provide a ‘secure and convenient’ way for European citizens and businesses to identify themselves when needed for accessing digital services ‘at the click of a button on their phone’, according to the Commission. They will be able to ‘securely store and use data for all sorts of services, such as checking in at the airport, renting a car, opening a bank account or when logging in to their account on large online platforms…. in addition, the EUDI Wallet will allow citizens to store credentials, such as a mobile driving licence, professional licences, eHealth or educational credentials,’ it explains.

The Commission states that its newly published framework will be thetechnical backbone’ to engineer a prototype wallet for testing various use cases. It complements a legislative proposal on a ‘trusted and secure digital ID for all Europeans’ that was also proposed in June 2021.

In a related initiative, the Commission is also supporting large-scale pilots, with up to €50 million (about £44.5m/$53.2m) of co-financing, to address ‘high-priority’ use cases for the wallet, including payments. The pilots are expected to begin during the first half of 2023.

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