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Europe matters: exploring the EU digital finance agenda

Global Government Fintech Lab 2024 panel session three: Ian Hall (moderator), Diego Villafáñez Sagardoy and Marine Krasovska | Credit: Deirdre Brennan for Global Government Fintech

GLOBAL GOVERNMENT FINTECH LAB 2024: PANEL SESSION THREE

The European Union (EU) is creating a growing number of fintech-relevant rules and frameworks. Senior public servants from two member states discussed the bloc’s regulatory agenda during the Global Government Fintech Lab 2024’s third session

The European Union (EU)’s strategy for fintech – or, to use the broader term often used among EU policymakers, digital finance – is generating a growing number of acronyms and initialisms.

With the 2024 Lab being hosted in Ireland (a member of the 27-strong bloc) and most audience members coming from EU member states, an ‘EU regulatory check-in’ focused on the most significant developments.

The ‘Keeping track of EU fintech regulation – and what’s next?’ session featured contributions from Diego Villafáñez Sagardoy, digital finance co-ordinator in the department of digital and sustainable finance in Spain’s Treasury; and Marine Krasovska, head of the fintech supervision department at Latvijas Banka (Latvia’s central bank).

PSD2’s importance

Invited to kick off by identifying the EU’s most significant achievements to date in the field of fintech, Villafáñez started with PSD2, which entered into force in 2016 and he described as the “basic rule for all kinds of payments” (PSD1 was introduced in 2007).

The directive was, he said, useful to identify two ‘types of fintech actors’: payment initiators and account information service providers. PSD2 had proved itself “important for innovation and creating new ways of paying,” he said.

In addition, PSD2 introduced strong customer authentication (SCA), with Villafáñez describing this as “an example of how the EU is leading global regulation in terms of fraud protection.”

Spain held the six-month presidency of the EU Council during the second half of 2023, with Villafáñez chairing fintech-relevant working groups. He highlighted an instant payments regulation, adopted by the Council in February 2024 (after the EU presidency baton had been picked up by Belgium), as among the Spanish presidency’s biggest achievements.

EU presidency timeline
The EU Council’s presidency rotates among the 27 EU member states every six months.
January-June 2023: Sweden
July-December 2023: Spain
January-June 2024: Belgium
July-December 2024: Hungary
January-June 2025: Poland
July-December 2025: Denmark

Instant payments regulation: a ‘boost’

The instant payments regulation will allow people and businesses to transfer euros within 10 seconds at any time of the day, including outside business hours, not only within the same country but also to another EU member state or European Economic Area (EEA) country.

Villafáñez mentioned Bizum, an instant payment service created by Spanish banks in 2016 to enable person-to-person payments through a smartphone. This, he said, has reached 24 million users in Spain and was partnering Portugal and Italy’s instant payment solution “in order to achieve interoperability and therefore more integration in the EU market.”

“It is splendid news for the internal market that we are able to pay our Italian friends within 10 seconds – this is amazing,” he said. “This regulation will speed up this adoption of instant payments that, for one reason or another, banks have not implemented yet. The standards are there and the technology is there – the regulation will boost them a bit when it’s applicable in a few months.”

Villafáñez also used his opening remarks to reference MiCAR, describing it as the world’s first crypto-relevant regulation with “very big” scope, and DORA.

In respect of MiCAR, he acknowledged that its scope was “not 100 per cent” (coverage of the multi-layered crypto market) but that “you need to begin with something” and that “we always know that regulation lags behind” market developments. “We [the EU] will have a review of MiCAR at some point to update it,” he said.

In respect of DORA, he referred to his observation on an earlier panel at the Lab (‘Governments and the future of finance’) about the increased cybersecurity risks that accompany digitalisation, urging ‘financial entities’ to “integrate resilience”.

RELATED ARTICLE European Parliament backs crypto rules to put EU ‘at forefront of token economy’ – a news story (25 April 2023) on European parliamentarians voting overwhelmingly to approve the Markets in Crypto Assets (MiCA) regulation, making EU the world’s first major jurisdiction to establish a comprehensive regulatory framework for crypto-assets

EU seeks ‘competitive advantage’

Marine Krasovska at Global Government Fintech Lab 2024

Krasovska began by stating that, from a supervisory viewpoint, the EU had – from an overarching perspective –  “achieved quite good competitive advantage”, with relatively harmonised requirements and regulatory clarity creating “open market possibilities for the companies from banking and non-banking to create new types of businesses and, of course, to facilitate innovations.”

She then picked up on MiCAR, which she agreed could be described as already outdated “a bit” because regulation can struggle to keep pace with the rate of innovation.

“If we look to new types of the business models in crypto areas, MiCAR is like a quick-fix solution to put regulation in place because it creates new types of systemic risk,” she said. “If we were writing MiCAR today most probably we [would] look from other angles because there are plenty of questions outside MiCAR.”

“And, of course, we always need to think about ‘why’ to regulate, and should we regulate everything, because we are trying to regulate too many things at times,” she continued.

She mentioned the decentralised finance (‘DeFi’) market as “also quite a huge market but out of scope”; and the metaverse (virtual world in which users, represented by avatars, interact). “The number of transactions and frauds in the metaverse [is] equal to the payment transactions of some middle [mid-sized] country,” she said.

RELATED ARTICLE European Commission introduces proposals on payments and financial data access – a news story (5 July 2023) on Commission proposals designed ‘to ensure the EU’s financial sector is fit for purpose and capable of adapting to the ongoing digital transformation, and the risks and opportunities it presents – in particular for consumers’

Compliance ‘army’: who pays?

Krasovska then mentioned the EU Artificial Intelligence (AI) Act, which – like MiCAR – has seen the EU becoming first-mover globally in providing a legal framework for a fintech-related space. It was adopted by MEPs in March and will be fully appliable in 2026.

“Europe has approved the AI Act that also will be applicable for financial system,” Krasovska said. “But you will see that, for example, what is China’s approach? Are they [China] going to limit those innovations in the way [that we do] by this act? What is the US response? Those approaches to AI are different.”  

Her concern was whether the AI Act risks stifling innovation across Europe, saying that compliance costs will ultimately be partly borne by customers.

To illustrate the growth in EU laws applicable to many (small) fintech businesses, she provided a theoretical example of a company planning to ‘issue e-money tokens’ (cryptographic tokens used for exchange and pegged to a fiat currency). “The company, which could be managed by [just] 10 or 12 people – they have to hire an army of compliance people in order to be compliant to the MiCA regulation, to the payment service directive regulation, to DORA regulation; [and] if they’re using AI, the AI [Act]. Who will pay for [this]? Only customers.”

She then focused on her own remit within a financial market supervisory authority. “The same is, of course, applicable to supervisors because supervisors have to hire new skills to do the job; they have to create new SupTech [supervisory technology] solutions in order to manage the risks. And again, who will be paying for that? The market participants [companies],” she said.

Fintech lawyers in the money

Ian Hall, Diego Villafáñez Sagardoy and Marine Krasovska during the Global Government Fintech Lab 2024 session focused on EU policymaking

In the build-up to the Lab, Global Government Fintech held a webinar (22 February) during which Barbara Voelkl of Germany’s Federal Ministry of Finance suggested that ‘a lot of consolidation’ after a flurry of EU lawmaking could be helpful because ‘we need is to give the market a bit of slack to actually adopt these [new rules], and actually be able to evaluate these, particularly regarding new technologies.’

Villafáñez and Krasovska were asked if they agreed with this perspective. In short, what’s next on the EU’s fintech-related agenda?

“I think it’s a great moment to become a lawyer in fintech – they will have a lot of business because I think things are speeding up,” Villafáñez responded.

“One month before the start of [the Spanish EU] presidency, the Commission released six legislative proposals in the field of fintech,” he reflected. “There were many things there and very disruptive – all of them have the potential to really shake [up] the market for the better or worse.”

Villafáñez said that “the biggest impact without doubt” could flow from the digital euro package (28 June 2023). At present, the European Central Bank (ECB) is more than six months into its two-year ‘preparation phase’ to launch a potential eurozone central bank digital currency (CBDC) as EU lawmakers try to piece together a legal framework for a possible digital euro as a complement to banknotes and coins.

“The ECB path and the legislative path are two paths that run in parallel,” Villafáñez explained. “We don’t know when Parliament will end [conclude] the review of the [legal] text. The feeling in the Council is that we are not in a hurry to pass the digital euro because it’s something so disruptive that we really need to understand all the implications to calibrate everything. It’s a very powerful instrument to achieve many policy objectives – strategic autonomy, inclusion, innovation – but it has some risk as well. So, if one legislative issue needs to be really well thought, it is this.”

RELATED ARTICLE Digital transformers: government finance and innovative technology – a write-up of the Global Government Fintech Lab 2024’s second panel session (in which Villafáñez also participated)

EU digital finance’s ‘complicated’ future

Krasovska predicted a more “complicated” future for EU digital finance.

First, she described “growing complexity between service providers, between market participants, between business models”.

“There is growing dependence on IT and growing dependence on third-party providers,” she said. “There is no ‘exit plan’ even for significant institutions to take back the functions that have been outsourced. That, actually, is a problem.”

She highlighted a lack of ‘European’ IT and cloud service providers, saying this created systemic risk. “Where is our data, and where exactly is European money, because also transactions in payment sectors they are already in clouds without [the] possibility to get this function back. And that is absolutely real. This is a question of national security, I would say.”

“And of course, [there is] growing complexity between business institutions,” she continued. “It [systemic stability] relies on the capacity, level of understanding and level of education of supervisors.”

She concluded with a short point on CBDC, saying that “the project could move much faster if we [had] fantastic retail use-cases of application”.

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