For European regulators charged with coordinating and guaranteeing the financial industry’s stability, the burgeoning blockchain technology brings several pressing challenges. This is partly due to the fact it remains at a very nascent stage of development.
That seemed to be the consensus of a policy panel discussion at the European Blockchain Week on Thursday, where it was argued that the EU’s introduction of an ambitious range of new measures covering blockchain and cryptocurrencies is complicating the job of regulators.
The Digital Finance package announced by the European Commission in September last year included two tangible sets of rules that are expected to become law as early as the first quarter next year- the Markets in Crypto Assets (Mica) and the Digital Operational Resilience Act (Dora).
The struggle to establish regulations for new generations of technology
“It is difficult to regulate something that is very new and constantly changing, like blockchain,” said Lukas Repa, a senior policy officer at the European Commission.
“Things are moving very fast in this field. When the Commission started looking into blockchains a few years ago, there were no non-fungible tokens. Now we have them everywhere,” he said.
“The way everyone was thinking about tokens just two years ago is now totally outdated. Two years ago, the focus was on ICOs.”
Initial coin offerings – the cryptocurrency industry’s equivalent of an initial public offering (IPO) – allow companies that create a new coin, app, or service to raise funds.
Holding together fragmented markets
Regulatory fragmentation is another notable issue that continues to make life difficult for both the sector and lawmakers, said Nejc Novak, founder of the Ljubljana-based Novak Law firm.
“I will argue that the current low levels of financial integration in the euro area are inefficient, and that, as a response, we need to intensify our efforts if we want to achieve tangible progress in emerging technologies”.
Market fragmentation is a source of concern, Lukas concurred. “Everything is happening in the context of an ever-faster innovation cycle and in the context of the Green Deal.
“Ultimately, it comes down to removing obstacles that fragment our European single market that makes it difficult for innovative financial firms to scale up.”
A financial instrument by any name
To illustrate, Lukas said, the concept of financial instrument is interpreted very differently across the European Union. “This exposes us to risk in the area of digital coin offerings, stablecoins, and so forth.
“Is it a financial instrument? Is it not a financial instrument? These questions are still answered differently whether you’re issuing in France or Germany or another country.
“That’s why the proposal for a digital identity wallet is extremely important.”
The European digital wallet consists of an app that will give access to services via a single online ID, meaning that users are not required to memorise or store many passwords to access a patchwork of services.
The app will be accessible via biometric methods such as fingerprint or retina scanning. It will allow users to log onto local authority websites, pay utility bills and store important official documents, such as their driver’s license, as well as passwords and payment details.
The burden of tradition and legacy
Further complicating the problem of market fragmentation are persistent legacy issues in the tech and financial sectors, said Pierre Maro, an official at the Commission’s European Blockchain Partnership.
“In Europe we’re still saddled with both legacy regulations and legacy systems. These are a major hindrance to the kind of changes that are required,” he said.
“It also explains in part why in spite of the great projects, great ideas, and talent that we have, it is still challenging for us to emerge.”
Cybersecurity, the constant threat
While digitalisation brings enormous opportunities and provides solutions for many of the challenges Europe is facing, not least during the Covid-19 crisis, it also exposes the economy and society to cyber threats, said Novak.
“Without security in our financial markets, there cannot be a financial market at all,” he said.
In a constantly changing cyber threats environment, EU Member States need to have flexible and dynamic cybersecurity strategies to meet new, global threats, Novak added.
Lukas agreed, adding that all countries in the EU currently have a National Cybersecurity Strategy (NCSS) as a key policy feature, helping them to tackle cyber risks.
Lawmakers’ legacy approach vs new technologies
Yet another issue, not limited to the EU but particularly present there, is that “in general, technologies are hard to understand for regulators, because it’s so difficult to find the regulatory access points,” Lukas said.
“While blockchains are databases, they function unlike any other databases. Because of that it’s very difficult for most people, including regulators, to get their minds around it. It’s really hard to understand what can be done, what should be done, and shouldn’t be done about it.”
These challenges, he said, are preventing many start-ups from pursuing their growth beyond the pilot level.
“This is really a task for us in Brussels and a task for policymakers at the national levels”.