Brussels, 7 February 2023
Keynote speech by Commissioner McGuinness at 7th Annual Fintech and Regulation Conference
Ladies and gentlemen, a very good morning.
Digitalisation is changing all of our lives and digital technology is transforming the financial system – allowing for speedier transactions and online services. You can send and receive money within seconds. You can get a mortgage or make an investment without ever setting foot in a bank branch. And behind the scenes, Artificial Intelligence is revolutionising the way financial companies work.
There are many benefits to these new ways of doing business. But we do need to make sure that these changes happen in the right way. We need infrastructure to be resilient and secure. And we need to keep consumers safe, and build trust and maintain that trust. At a broader level, we need to make sure our economy stays competitive.
And that can be done by supporting innovation and using technological developments to enhance financial services. So with that in mind, we have set out an ambitious legislative agenda for digital finance and payments. So I’m going to talk to you today about what we‘ve done already, and what‘s coming next – including the digital euro and open finance.
Our policy over the past few years has been about making sure we can trust the financial system as it undergoes big changes. That means making sure infrastructures and IT systems are stable and secure.
Customers need to know they will be protected against theft and fraud. And innovative financial firms need to be able to trust that they can operate and scale up in a clear, predictable legal environment. To help build up trust, we have the Digital Operational Resilience Act.
Banks and other financial companies will be required to put measures in place to withstand cyber-attacks and other digital threats. Critical ICT providers for services like cloud computing will be subject to oversight. The European Supervisory Authorities are working on technical standards to give full effect to DORA. And the law should apply from 2025.
Trust is also important in the world of crypto, which can come with big risks, and we’ve seen that recently with the collapses of projects such as FTX, Terra Luna, Celsius and Voyager. Some regulators think we should avoid regulating crypto because, by doing so, we legitimise it. But ignoring crypto is not the answer. Because a lot of people have invested in crypto over the past decade.
If we look at FTX, the insolvency filings show 5 to 7 percent of investors were EU clients – invested directly or through offshore funds. Second point, while the Financial Stability Board’s assessment is that the crypto market is still too small to trigger systemic risks – we also know that there are increasing links between crypto markets and traditional regulated financial service providers.
So this could be a financial stability concern in the future. We need to separate the technology behind crypto from some of the recent events. Distributed ledger technology has many applications today and in the future this technology could make the trading and settlement of securities much more efficient.
We have taken a step to test this technology by creating a pilot regime. Our DLT pilot aims to develop secondary markets for ‘tokenised’ financial instruments. Market participants can experiment with trading, clearing and settling securities.
Just next month they will be able to experiment with this technology in a safe environment. We’ll look at how DLT works in real-world situations and depending on the lessons learned, we’ll propose possible changes to legislation. To address the developments in crypto, we have the regulation on markets in crypto-assets – or ‘MiCA’.
It addresses many of the issues that led to the FTX collapse. It will require stablecoins marketed in the EU to be backed by a reserve of assets. Crypto-asset service providers will need appropriate risk management, governance and conflict of interest arrangements. Providers will be required to separate out clients’ assets and they will not be allowed to use them on the service provider’s own account.
We’ve also included the crypto ecosystem in our anti-money laundering rules. MiCA will introduce a disclosure obligation for issuers and trading venues, with clear guidance on how disclosures should be carried out. And we in the Commission will also review the environmental impact of crypto assets as part of the general review of MiCA. And we will consider the need for additional policy measures in the future.
The collapse of FTX demonstrated the international nature of crypto markets, so international cooperation is key. Now here we’re working with the Financial Stability Board and other standard setters – the G7 and the Basel Committee on Banking Supervision – on consistent global rules for crypto markets.
Let me move closer to home and to discussions around a digital euro. We all know that the use of ‘hard cash’ – euro banknotes and coins – to make payments is declining, as we move to digital transactions. What does this mean for the euro – and how do we future proof it, while also maintaining people‘s right to access and use physical cash? A digital euro would provide a complementary public money solution to private means of payment.
As a merchant or a corporate user, you would have an additional option to serve customers across the EU. You could use a digital euro to send and receive payments in central bank money, both in cash and electronically. And it could be an open solution – unlike many private options that often rely on both sender and receiver using the same closed interface.
Apart from the European Payments Initiative, which aims to offer a pan-European payments wallet, the payment systems we have today are national or international. The digital euro would give us a pan-European payment system usable anywhere in the euro area.
And that would also serve financial intermediaries – like domestic payment providers that want to expand beyond their national borders. The digital euro can also support financial inclusion. It could be usable offline – giving another payment option to people who don’t have access to the internet or in remote areas. And the digital euro could support our open strategic autonomy, too.
Today we’re heavily reliant on international card schemes even for card transactions and e-commerce payments within Europe. And without a digital euro, EU businesses looking to use digital money may come to rely on private ‘stablecoins’ or foreign central bank digital currencies, potentially exposing them to risks around market stability, currency conversion or losing control of their data.
Safeguarding the role of central bank money in a digital world is an important objective. But there are considerations around the design of a possible digital euro. To safeguard public trust, a high level of privacy and data protection is essential. And of course consideration of fighting financial crime is very important.
It is no surprise that commercial banks are questioning how a digital euro might impact their role as intermediaries. The investigative work of the European Central Bank is pointing to a digital euro primarily to be used as a means of payment, not a store of value – so it doesn‘t create an incentive to move deposits away from commercial banks. Now the distribution of the digital euro is also under consideration.
We want payment service providers to distribute the digital euro and maintain competition with private means of payments. And we should ensure that people at risk of financial exclusion have easy access to basic services based on the digital euro. For merchants the cost of accepting digital euro payments should be as reasonable as possible.
We are aware of the concerns of payment service providers about the potential impact of the digital euro on their business. Let me stress that a digital euro would co-exist with private payment solutions. Public and private money both play their role in our financial system.
Together with my fellow Commissioners who are working on this project, I‘ll soon be holding roundtables with consumers, banks, merchants and others to discuss all the technical, legal and policy issues that we need to get right.
It is the European Central Bank that will decide on whether to issue a digital euro or not. But a decision with such huge consequences for people, businesses and economies needs a strong democratic basis. Only the co-legislators can give the ECB the power to take this decision. In May, the Commission will propose a legal framework to regulate the essential elements of a digital euro, and the European Parliament and Member States will discuss and shape this proposal. And this is vital to make sure we get public trust and public buy-in for a possible digital euro.
Now looking to the private side of payments. We tabled a proposal last year to make instant payments the norm – where citizens and businesses benefit from fast, 24/7 service, and giving more payment options to consumers and businesses. More broadly, we’re currently reviewing the Payments Services Directive along four main themes:
- Preventing fraud
- Improving implementation and enforcement
- Making sure there is a level playing field between banks and other providers in access to payment services
- And Open Banking.
The Second Payment Services Directive set out the foundation for Open Banking. It allows payment account data to be shared with another provider, with a customer’s consent. The review will lay the basis for our work on Open Finance. Both pieces of work are scheduled for the second quarter of this year. Data is at the heart of our financial system – now more than ever.
With Open Finance, we want to put the customer in control of their data. Put simply, we want to enable more services based on data, while making sure customers know what data they are sharing and who it is being shared with. So that could mean a small business getting a quick answer on a loan application, based on sharing financial data with a bank. Or it could mean more personalised insurance offers based on a wider set of data.
Now some of the questions to be considered include:
- What data will be included in the scope?
- How will that data be standardised?
- What will the model of compensation look like?
- And how do we make sure we‘re maintaining a level playing field?
To be very clear, it will require strong safeguards on personal data. Information should only be shared with a third party subject to the consent of the customer. Customers should always have the right to withdraw access to their data. This open finance initiative is part of the Commission’s cross-cutting Data Strategy. We want to encourage fair data sharing – in all directions. We want all economic players to operate on a level playing field. And this is the same principle as with the Digital Markets Act, which tackles imbalances caused by the market power of powerful ‘gatekeeper’ firms.
Now looking to the future, we want to keep on harnessing the benefits of digitalisation and innovation while mitigating the risks. I hope that companies will seize the new opportunities our legislation opens up. We want to bring citizens along with us on this journey – especially with the new Retail Investment Strategy that will include considerations on how consumers behave in this new digitalised economy.
Thank you, and I wish you the best for your discussions today.
Source – EU Commission