Overview and State of Play The European Union (EU) is actively working on a comprehensive regulatory framework for digital finance. This addresses the growing use of new technologies in financial services, which brings opportunities (e.g., lower costs and financial inclusion) and risks (e.g., economic stability). The EU's 2020 digital finance package focuses on four key areas: digital operational resilience (DORA), crypto assets (MiCA), digital euro, and payment services.
Significant legislative progress has been made, with the Digital Operational Resilience Act (DORA) entering into force in January 2023 and the Markets in Crypto-assets (MiCA) Regulation in June 2023. These laws aim to strengthen the resilience of financial institutions, regulate crypto-assets, and promote innovation in a secure environment.
Implications for Firms:
Enhanced Operational Resilience: Financial entities must prepare for stricter requirements regarding digital operational resilience under DORA. They must implement robust governance and control measures for ICT risks and enhance their incident management capabilities.
Crypto-Asset Compliance: Businesses dealing with crypto-assets, especially stablecoins, must understand and comply with MiCA's regulatory framework. This includes adherence to rules on issuance, trading, and underlying asset management.
Open Finance: The proposed framework for financial data access could significantly impact firms' data-sharing practices, requiring them to give customers more control over their data and ensure secure and standardised data-sharing mechanisms.
Digital Euro: The potential introduction of a digital euro could reshape the payments landscape, prompting firms to adapt their payment systems and services.
Regulatory Sandbox: Firms can leverage regulatory sandboxes to test innovative financial products and services in a controlled environment, gaining regulatory feedback and reducing uncertainty.
Next Steps for Firms:
Compliance Readiness: Prepare for the implementation of DORA and MiCA by reviewing internal processes, risk management frameworks, and data protection measures.
Embrace Innovation: Explore opportunities presented by open finance and the potential digital euro, adapting business models and services accordingly.
Engage with Regulators: Actively participate in consultations and discussions with regulatory bodies to shape the future of digital finance regulation.
Consider Sandbox Participation: If relevant, utilise regulatory sandboxes to test and refine innovative financial products and services.
Overall, the EU's digital finance strategy is a significant step towards creating a harmonised regulatory framework for the digital age. Firms must stay abreast of these developments and adapt their strategies to ensure compliance, mitigate risks, and seize the opportunities presented by the financial sector's digital transformation