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EC blockchain head addresses the regulatory challenge

Pēteris Zilgalvis, head of the European Commission’s digital innovation and blockchain unit, talks about the potential of distributed ledger technology, digital currencies and fintech in Europe.
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Pēteris Zilgalvis

Pēteris Zilgalvis

Q: What are the major opportunities presented by blockchain technology in Europe?

A: We think that it presents an excellent technology for situations where different stakeholders need to collaborate but, due to competition or legal reasons, they do not want to or are unable to share a single database. In this sense, it can avoid a single point of failure.

While we don’t believe it is the solution for everything, distributed ledger technology [DLT] is proving useful in such applications as audit documentation certification, diploma certification, self-sovereign identity and regulatory reporting, where it is shown to be 30% to 80% more efficient.

The European Blockchain Services Infrastructure [EBSI], which operates across the 27 EU member states and Norway and Liechtenstein, is one initiative [aiming to deliver EU-wide cross-border public services using blockchain technology]. It reflects the multi-level governance of the EU. Rather than having a single database or all databases being sent to Brussels or Luxembourg, data stays in-country and is shared through publication on the blockchain nodes.

There are also many finance applications where banks don’t want to – or can’t for competition reasons – share a single database, but might find it useful to share information on anti-money laundering [AML], fraud and other areas.

At the same time, it can also facilitate a secure free flow of data when companies or individuals want to have their data [for example, identity attributes] move across borders.

Q: What challenges does blockchain present from a regulatory and implementation perspective?

A: Any new technology is not foreseen in the existing regulatory framework. The European Blockchain Partnership, which is building the EBSI, is like a regulatory sandbox. Together with the member states, the European Commission [EC] and the court of auditors, we are experimenting with the existing legislation frameworks while we are experimenting with the technology.

We have a pre-commercial procurement open now to improve scaling and the census mechanisms, as well as the privacy, of blockchains. The biggest challenge is governance. The best use cases for blockchain are where it is not one enterprise or entity but many [working together]. Thus, governance is important.

Q: How can DLT be used for AML processes?

A: We have very good collaboration in the context of the EBSI. There have been some early discussions and proposals from various CEOs in both [the Baltic region] and other parts of Europe to share information between banks on the blockchain. This is again an issue of governance because banks can face issues in areas such as data protection and contracts when sharing information about clients. So, the issue is again not so much about the technology, but how to govern the use of the technology.

Q: What is the EC’s view on central bank digital currencies [CBDCs]?

A: This is a decision for the European Central Bank [ECB], as it is responsible for the euro. It has set up both internal and external task forces and has published several papers on it. The EC is seriously evaluating it, as the commission has responsibility in terms of the euro’s international role. For example, if Facebook Libra launches [pegged to] the US dollar, or if Alibaba or WeChat Pay use a digitalised yuan, we want to ensure that Europe doesn’t become dominated by other digital currencies. So as a commission we are assessing digital currencies, and at the same time we are encouraging the ECB to look seriously at the benefits, as well as the possible risks.

Obviously for the EC, and the EBSI initiative, it would be easiest for us to use the euro in our blockchain infrastructure rather than another digital currency or cryptocurrency. These are some of the positive arguments, but that is not at all saying that the risks of bank stability and so on are not being considered. We think this is a discussion that should be had to uncover the use cases and benefits. But it would be ideal if there is a European and euro-variant available, from an industrial policy point of view.

Q: How is the EC looking at cryptocurrencies from a regulatory perspective?

A: We haven’t made any moves to prohibit anything, which stands against the stereotype of ‘if it moves, Europe regulates it’. We’ve been aware of Bitcoin and the like since at least 2012 and have been looking at them in detail. Nothing has been done at a regulatory level, except for things that apply to any kind of currency, such as AML and anti-fraud requirements.

Currently, there’s a public consultation open on digital assets that will look at the classifications of, for example, investment tokens, payment tokens and utility tokens, among other things. If something is done to change the way e-money is regulated or the development of a specific regulation for cryptocurrencies, this will be very much done in a ‘pro-innovation’ spirit to allow initiatives that are not fraudulent to flourish in Europe, while perhaps getting some legal certainty at the same time.

Q: How is the fintech landscape developing in Europe?

A: I would say fintech is one of the strengths of Europe, especially in London and the UK – and we will see how we work together going forward – but also in other ecosystems such as Paris and Frankfurt, as well as in the Baltic countries. There is a strong fintech community in Lithuania, with some unicorns in Estonia and peer-to-peer lending platforms in Latvia.

I think one of the things that digital has made possible is a holistic view of the ecosystem. The digitalisation of the financial system is enabling various digitalised processes in manufacturing, micro-payments, electric cars and charging across borders, effectively supporting seamless business models. You can already see ambitious visions emerging from having this kind of ecosystem in Europe, linking manufacturing, climate, mobility, finance, blockchain, artificial intelligence and the Internet of Things. I think there are many possibilities, and the EC and member states want to promote this.

Micro-payments are another area that open up a lot of new opportunities. I have talked to many banking groups who are looking at how they can enable payments for various processes that are too small to do effectively with credit cards and transfers. This is an area that can make the financial system fit for the digital age of tomorrow.

Q: How would you assess the commitment of fintechs to regulatory compliance?

A: While this is very much the focus of my colleagues in financial markets and the ECB, rather than me specifically, I still have conversations around this topic with fintechs due to my involvement on the industrial policy side. I believe there are two main points to make around compliance.

First, it is worth noting that fintechs are new enterprises, often with new business models and technology. I’m encouraged by the innovation hubs and regulatory sandboxes, which enable start-ups to test new innovations in a controlled ring-fenced environment. One concern is that some individuals at fintechs may have expertise as software engineers, for example, but don’t necessarily have a background in finance. Thus, they may not always be aware of regulatory frameworks for the provision of financial services, or their business model might fall between different frameworks. However, there are many countries across Europe – Lithuania being a great example – where the regulatory sandbox approach is being used to great effect to ensure fintechs are compliant with regulatory frameworks.

Second, it is often the case that the complaints levelled against fintechs about their lack of compliance are coming from large incumbent financial institutions. Most large incumbents must deal with a much broader range of regulations across their different business lines, while fintechs tend to focus on a single niche area. Therefore, the incumbents’ main complaint is that a relatively lower compliance burden gives fintechs an unfair competitive advantage. In my view, there is sometimes a grain of truth to complaints about fintechs’ compliance levels, but other times it might be an [unfounded] argument against competitors.

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