Propensity to change: Founded numerous international groups to promote blockchain adoption including the Blockchain Partnership and INATBA. Leadership and strategy from the EU Blockchain Observatory & Forum.
Legal certainty: They have created specific regulations defining virtual currencies (5AMLD) and have been pushing the Commission to come up with regulation (Motion for a Resolution and trade policy report). They also have a Fintech Action plan.
Infrastructure: lots of investment through Horizon2020.
The European Union (EU) is already a bellwether in regulating Big Tech and data protection standards and has enacted a number of policies to promote the use of blockchain across Europe. Key to the EU’s strategy is setting the right conditions for the advent of an open, innovative, trustworthy, transparent, and EU law-compliant data and transactional environment. The aim is to enable an EU-level framework supporting blockchain-based services that respects the maximum harmonisation principle of the Single Market. Four institutions stand at the heart of this blockchain implementation in Europe: the European Parliament, the European Commission, the European Supervisory Authorities (ESAs) and the EU Blockchain Observatory & Forum.
The EU already stands ahead of most jurisdictions in establishing a regulatory space to encourage blockchain adoption. The latest legislative initiatives suggest a strong will in the EU parliament to implement a solid regulatory framework that will bring legal certainty to the blockchain space.
- The European Parliament first adopted a Motion for a Resolution on Distributed ledger technologies and blockchains: building trust with disintermediation (October 2018). The motion calls on the Commission to undertake policy initiatives related to Distributed Ledger Technologies (DLTs) that will promote the EU’s competitive position in this area and positively affect many sectors of society such as energy, transport, health, supply chains, education, creative industries, and financial. Crucially, this motion has become a reference point for future blockchain-related reports in Parliament and has provided guidelines to the Commission, along with policy directions, preparing the ground for further action.
- Building on this motion, Parliament then passed the Report on Blockchain: a forward-looking trade policy (December 2018). The Report highlights the current sub-optimal issues in supply chains, EU trade policy and customs procedures, identifies the plausible benefits derived from widespread blockchain implementation, and recommends gradual policy steps to the European Commission and Member States to enable this technology to function.
- While cryptocurrency is not the primary focus of this report, it is nevertheless worth noting that the exponential rise in the use of cryptocurrencies has also led to growing concerns over the use of blockchain technology for transferring value in a way that circumvents authorities and regulatory oversight. As such, the Fifth Anti-Money Laundering Directive (5AMLD) (May 2018), increased the scope of EU AML rules to include exchange service providers between virtual and fiat currencies as well as custodian wallet providers.
Meanwhile, the European Commission has also taken positive steps to promote blockchain innovation across Europe. Two Directorate Generals which are key to the EU’s blockchain strategy and policies are: the Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), responsible for EU policy on banking and finance; and the Directorate General for Communications Networks, Content and Technology (DG CONNECT), responsible for developing a digital single market to generate smart, sustainable and inclusive growth in Europe.
DG FISMA’s main input in this space has been through its FinTech Action Plan (March 2018). The Plan aims to aid the financial industry in making use of rapid tech advancements including blockchain. Based on this Plan, the Commission tasked the ESAs to consider, within their own remit, the crypto-asset space (including cryptocurrencies). These were published in January 2019 (see European Supervisory Agencies (ESAs) below).
Based on the advice given, in December 2019, the European Commission launched a public consultation on an EU framework for markets in crypto-assets. The Commission will use the responses to help assess the best way to enable the development of a sustainable ecosystem for crypto-assets while addressing the major risks they raise. Stakeholders have until 19 March 2020 to respond to the consultation, which contains four separate sections:
- First, the Commission seeks views on the use or potential use of crypto-assets;
- Second, the Commission seeks feedback from stakeholders on whether and how to classify crypto-assets. This section concerns both crypto-assets that fall under existing EU legislation (those that qualify as ‘financial instruments’ under MiFID II and those qualifying as ‘e-money’ under EMD2) and those that do not;
- The third section invites views on the latter, i.e. crypto-assets that currently fall outside the scope of the EU financial services legislation. The aim of these questions is to determine whether an EU regulatory framework for those crypto-assets is needed. The replies will also help identify the main risks raised by unregulated crypto-assets and specific services relating to those assets, as well as the priorities for policy actions; and
- The fourth section seeks views of stakeholders on crypto-assets that currently fall within the scope of EU legislation, i.e. those that qualify as ‘financial instruments’ under MiFID II and those qualifying as ‘e-money’ under EMD2. Responses will allow the Commission to assess the impact of possible changes to EU legislation (such as the Prospectus Regulation , MIFID II, the Central Securities Depositaries Regulation …) on the basis of a preliminary screening and assessment carried out by the Commission services. This section is therefore narrowly framed around a number of well-defined issues related to specific pieces of EU legislation. Stakeholders are also invited to highlight any further regulatory impediments to the use of DLT in the financial services.
DG CONNECT considers blockchain to be one of the key technologies that will underpin the Digital Single Market. To this end, it first launched the Blockchain Partnership (April 2018), a Declaration signed by multiple Member States, which aims to:
- promote cooperation towards a European blockchain infrastructure;
- develop governance models, compliant with EU laws and reflecting its values;
- ensuring interoperability;
- stimulate new business models; and
- position Europe in a leadership role;
DG CONNECT also announced the creation of the International Association for Trusted Blockchain Applications (INATBA) (November 2018), in cooperation with industry leaders. While the Commission is involved in this initiative as a facilitator to help bring together private and public organisations involved in Blockchain and DLTs, it will not become a member itself. The process for setting up the Association as an “Association Internationale Sans But Lucratif” (i.e a non-profit association) under Belgian law began on 6 March 2019. The Association was officially launched on 3 April 2019. It aims to develop a framework that promotes public and private sector collaboration, regulatory convergence, legal predictability and ensures the system’s integrity and transparency.
Finally, in December 2019, DG CONNECT launched an Online questionnaire for European Blockchain Pre-Commercial Procurement (PCP). The PCP is looking for novel blockchain solutions for the European Blockchain Service Infrastructure (EBSI). The open market consultation, which will run until 2 March 2020, offers an opportunity to provide feedback on the scope of the future PCP and to be involved in and co-create the future development of EU-wide blockchain solutions.
The blockchain PCP focuses on the development and testing of a novel distributed ledger or blockchain solution which builds on the EU legal framework, in particular the GDPR Regulation, the eIDAS Regulation and the NIS Directive. Such a public infrastructure should meet core requirements of scalability and throughput, interoperability with other systems, security, robustness, high sustainability / reduced environmental footprint, energy efficiency and continuity of the service. It should anticipate the implementation of a wide range of new cross-border use cases or services that could be public or private ones. The aim of the PCP is to go significantly further than what is offered by existing solutions. The PCP will start in 2020, with the objective to lead to the deployment of solutions within the next three years.
Further, the Joint Research Centre, the European Commission’s science and knowledge service, published a flagship Report, “Blockchain now and tomorrow – Assessing multidimensional impact of distributed ledger technologies” (September 2019). The Report explores the challenges and impacts of distributed ledger technologies. It offers an in-depth and practical understanding of blockchain and how the technology can be used in finance, industry, trade and the public sector in the future.
On 5 December 2019, the Economic and Financial Affairs Council (ECOFIN), responsible for economic policy, taxation issues and the regulation of financial services, met for a Public Session on a number of matters, including stablecoins. There, it adopted the final version of the Joint Council and Commission statement on “stablecoins”. The Joint Statement calls for a common EU approach to crypto-assets, including stablecoins, which may potentially include new legislation. Until legal certainty is established, global stablecoin initiatives should not operate in the EU. In his statement, following the Joint Statement’s adoption, Valdis Dombrovskis, DG FISMA, European Commission, stated that “Going forward, we intend to propose a dedicated legislative framework on crypto-assets. My team is working to prepare this work, and the Joint Statement is an important part of this. We will consult closely with all stakeholders. On crypto-asset regulation, it will be part of our overall Digital Finance Strategy. We want to make sure the EU embraces digital changes in the financial sector, while mitigating the risks.”
European Supervisory Agencies (ESAs)
The ESAs is composed of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA).
In January 2019, both the EBA and ESMA published their advice to the Commission. The EBA concluded that the Commission should carry out a cost/benefit analysis to assess, on a holistic basis, whether EU-level action is appropriate and feasible at this stage to address the issues identified. Such a cost/benefit analysis should take account of the potential application of DLT and crypto-assets beyond the financial sector, and should extend to aspects relating to the environmental impact of some crypto-asset activity. The EBA also advised the European Commission to have regard to the latest recommendations and any further standards or guidance issued by the Financial Action Task Force (FATF) as part of a holistic review of the need, if any, for action at the EU level. It also called on the Commission to take steps where possible to promote consistency in the accounting treatment of crypto-assets. ESMA supported this view, adding in its own report that greater clarity should be provided for crypto-assets that constitute financial instruments and a bespoke regime should be implemented for those that do not. Based on the ESAs’ findings, the Commission will now assess whether and what type of legislative action is needed.
In October 2019, the ESA’s Joint Committee, a forum with the objective of strengthening cooperation between the authorities, published its 2020 Work Programme. Areas of particular focus include financial innovation – also in relation to the European Commission’s FinTech Action plan and the work of the European Forum for Innovation Facilitators (EFIF) – as well as sustainable finance and securitisation.
In the area of Tokenisation and distributed ledger technologies, the ESAs plan to assess:
- trends in tokenisation and the use of DLT-based applications (which may or may not entail crypto-assets);
- major regulatory and supervisory themes, including any areas in which:
- common views on the appropriate regulatory and supervisory response are reached;
- recurrent regulatory obstacles or gaps impeding the scaling up of financial innovation are observed that may warrant attention by the ESAs and/or European Commission;
- policy action may be needed to address any risks to consumers, market integrity or for financial stability.
EU Blockchain Observatory & Forum
Finally, a major tool for assessing blockchain-related policies at the EU level is undoubtedly the EU Blockchain Observatory & Forum.
Launched in February 2018, this body aims to accelerate blockchain innovation and the development of the blockchain ecosystem within the EU, and so help cement Europe’s position as a global leader. It is run under the aegis of DG CONNECT. Partners include ConsenSys AG (general contractor), the University of Southampton, the Knowledge Media Institute at the Open University, University College London, and the Lucerne University of Applied Sciences.
Although the Observatory does not have direct legal significance, its reports, such as “Blockchain for Government and Public Services” and “Blockchain and the GDPR” will certainly be considered by the Commission when assessing legislative action.
Further, over the course of 2019, the Observatory hosted a number of workshops with stakeholders, taking deep dives into a number of key blockchain themes, including:
- Digital assets: Blockchain makes it easy to “tokenise” physical and intangible assets offering benefits from reducing costs and adding efficiencies to primary and secondary asset markets to programmable securities and new models, like fractional ownerships. The Observatory’s examination covered these and other issues as well as early projects, use cases and emerging best practice.
- Legal and regulatory framework: During the year, the Observatory looked at the intersection of blockchain and the law from a number of different angles. These included, among others, the legal standing of smart contracts and blockchain-based registries, token taxonomies, and thorny liability and jurisdictional issues associated with blockchain-based platforms and fully decentralised, autonomous organisations (DAOs).
- Digital identity: The Observatory continued its exploration of blockchain and digital identity with the publication of the thematic report. The focus was decentralised identity (DIDs) in general, as well as the specific case of self-sovereign identity (SSI). Blockchain can play a role in helping to shift the identity paradigm to a more user-centric model.
- Scalability, interoperability and sustainability: The Observatory’s work on this theme took it into both large-scale, organisational questions, and specific technical ones (for the latter, see below). With the multitude of protocols, platforms and consortia arising in Europe and the world today, the Observatory foresees a future “multiverse” of blockchains, in which different blockchain protocols, platforms and consortium models will be deployed for specific use cases and markets, but will also be able to communicate with each other. They also looked at questions around how to successfully build and run such platforms and consortia.
- In the technical parts of the scalability work, the Observatory looked at how new consensus models as well as innovative approaches and new technologies can help solve blockchain’s scalability issues, the technical considerations when interoperating between blockchains, and ways that we can ensure that blockchain technology in future is sustainable from an environmental standpoint.
- Convergence of blockchain with AI and IoT. Blockchain is one of a number of emerging technologies that are making a big impact on our world. During the year, the Observatory looked at how blockchain is likely to work in concert with both AI and IoT to bring life to “digital twins” and construct large-scale platforms, like smart cities or smart supply chains, with innovative new capabilities.
- Financial services. It’s no secret that banks today face increasing costs and decreasing revenues thanks to a number of factors including more costly regulation, more volatile and risky markets and highly complex products. From radical automation in asset markets to stablecoins and central bank digital currencies, to new kinds of payment options for retail users, blockchain is set to spur innovation. But there are many technical and regulatory questions to solve along the way.
- Cyber security. Blockchain raises and faces a number of critical security issues. These range from security of blockchains themselves, to the security of smart contracts and digital assets, to data security and privacy on blockchains.
The EU is also heavily investing in research innovation and start-ups. Through the Connecting Europe Facility and Horizon2020 Programmes, the EU is co-investing in the most advanced digital infrastructure and innovative start-ups.
This page was last updated on 10 February 2020 to reflect recent developments.