In a recent session members of the European Parliament voted not to develop new regulative measures for blockchain systems, hoping to spur innovation and recognising the potential of the technology to bring substantial progress for economic development and consumers in particular. During the plenary session MEPs discussed the role of Bitcoin and virtual currencies focusing on the risk of their being used to launder money or finance terrorism (see related post here). As a result, Parliament voted in favour of a non binding resolution that the EU Commission should set up a taskforce to monitor virtual currencies. The resolution was drafted by German MEP Jakob von Weizsäcker and suggested that taskforce, which would be overseen by the Commission, should build expertise in the underlying technology of virtual currencies and would also be tasked with recommending any necessary legislation.
The draft, however, warned against taking a heavy-handed approach to this new technology, which, it says, can offer significant opportunities for the consumer and economic development. MEP von Weizsäcker said that “to avoid stifling innovation, we favour precautionary monitoring rather than pre-emptive regulation. But IT innovations can spread very rapidly and become systemic. That’s why we call on the Commission to establish a taskforce to actively monitor how the technology evolves and to make timely proposals for specific regulation if, and when, the need arises” In other words, MEPs have appreciated that potential of the blockchain technology and the risk of killing it in its tracks by introducing a restrictive regulatory framework.
Jonathan Hill, Commission for Financial Stability, Financial Services and Capital Markets Union voiced his support for the decision by saying that he agrees “that this is both an important and exciting area and I welcome the very balanced approach to keep an eye on developments, embrace the opportunities but be alert to the dangers. In recent months we have accelerated our work to examine whether it could be linked to funding terrorism activities.”
The resolution of the European Parliament is based on the draft report by its Committee on Economic and Monetary Affairs, which was published in February earlier this year. Like the resolution the report stresses that Virtual Currencies and DLT have the potential to contribute positively to consumer welfare and economic development mainly by means of reducing costs and enhancing the speed of payment systems.
This is good news for innovation, but doesn’t come as a massive surprise since regulators on EU level and national jurisdictions have chosen similar approaches. The German financial regulator BaFIN, for instance, recently produced several reports to provide guidance on the current regulatory status of the blockchain technology and virtual currencies (see related post here). In an assessment on Bitcoin and the risks to which users of this and other cybercurrencies may be exposed, the regulator analyzed how virtual currencies are already covered by existing laws. In a separate report on distributed ledger technology and its application, BaFIN tried to explain how DLT works, how it can be applied and what effect it may have on the financial market. In its conclusion, the report stated that BaFIN has been monitoring the latest developments in the FinTech industry very closely and is engaged in discussions related to DLT with other supervisory authorities.
This is in line with a general trend among regulatory authorities that try to understand the technology better and waiting for concrete applications first before coming up with respective rules. The Financial Stability Board, international body that monitors and makes recommendations about the global financial system, as part of its meeting in March reviewed major areas of financial technology innovation, including distributed ledger technology, and proposed a framework for categorising them and assessing any financial stability implications. Plenary members discussed the issues raised for public authorities by these technologies, possible steps to address potential risks, and opportunities for cooperation in the FSB and with the standard-setting bodies to deepen analysis and develop regulatory perspectives.
So, the publication of a consultation on the usefulness of Distributed Ledger Technologies by the European Securities and Markets Authority (see here) is rather just a chip off the old block since the regulator s seeking feedback from stakeholders on the possible use of DLT in securities markets, its potential benefits and the risks that such broader use may pose (for more information on the ESMA consultation see our separate post). Thus ESMA intends to gather more information by involving all interested parties before it decides on future measures. It should be kept in mind though that any legislative initiative especially on blockchain is likely not to come from ESMA but the Commission or the Parliament in line with the legislative process and powers of the European institutions (for more information on this topic, have a look here).
However, as reasonable this approach might seem, it obviously also creates some headaches for firms involved in developing solutions based on the blockchain since they have to anticipate what eventual regulations could look like in order to avoid that it gets stopped in its tracks. Not an easy task but existing regulation can help to get an idea as some aspects of blockchain application will already be covered under current rules and legislators will seek to create comprehensive regulatory frameworks between separate regulatory initiatives like, for example, the EU tries to achieve through MiFID II, MAD II/MAR, and EMIR to name a few. This is exactly what ESMA has pointed out in its consultation paper in relation to the activities, for which it sees application in securities markets and how these would be covered by existing regulation. Keeping this in mind, FinTech firms that are involved in the development of blockchain applications better seek advice on the potential implications of current and future legislation at an early stage.