The European Commission (“EC”) has stated that the almost limitless list of potential use cases of distributed ledger technology (“DLT”) makes it both very promising and challenging, and has expressed its support for blockchain and DLT.[1]  However, many European institutions are still of the opinion that the technology is at its early stage of development, and it is therefore too early to regulate it.  They rightly see a risk that early regulation could limit its further development and potential.  Moreover, too early regulation could fail to regulate appropriately the relationships and reduce the risks associated with the use of blockchain technology.

The EC also indicates that it needs to “be able to make the distinction between a hype and a true opportunity to improve the lives of our citizens and businesses.  That’s why we [the EU] need to launch more proof of concepts and pilots in different domains and according to different use cases.”[2]  On this basis, the EU is currently exploring various applications of blockchain technology and its possible benefits both for public and private sectors.

As far as virtual currencies like bitcoin are concerned – which are based on blockchain technology – it seems that the EU has more concrete views.  Central banks of the EU Member States do not consider virtual currencies as equivalent to money, and they are not treated as legal tender.  The European Central Bank typifies virtual currency as a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money.  In many Member States, there is also no specific virtual currency regulation, and in many cases only a series of opinions and warnings has been issued by central banks or regulators.  Germany has the most elaborate rules, and considers virtual currencies as units of account – which does not confer them the status of legal tender.[3]

Moreover, the surge in interest in bitcoin and similar virtual currencies, as well as their price fluctuations, have recently attracted the attention of the EC.  In December 2017, the EC’s Vice-President, Valdis Dombrovskis, wrote a letter to the European Supervisory Authorities asking them urgently to update their warnings from a financial stability and investor protection perspective to address bitcoin’s price volatility.  In addition, in his recent speech of January 2018, Vice-President Dombrovskis said that the EC wants “Europe to embrace the opportunities of blockchain, the technology underlying cryptocurrencies.  But to do so, we [the EU] must be vigilant and prevent cryptocurrencies from becoming a token for unlawful behaviour.”[4]  He also mentioned that he intends to bring together key authorities and the private sector in a high level roundtable soon, to assess the longer-term significance of cryptocurrencies beyond the current market trends, since they may have ramifications for many other areas, including for central banks.  Cryptocurrencies and the related regulatory questions are clearly a focus of the EU’s attention, and may be subject to regulatory action in the year to come.

This post gives a brief overview of the main EU-level initiatives on, and approaches to blockchain and virtual currencies.

The European Commission

Virtual Currency Legislation Relating to Anti-money Laundering and Terrorist Financing

In December 2017, the Council of the EU confirmed that an agreement had been reached between the European Parliament and the Council of the EU on the amendments to the 4th Anti-Money Laundry Directive (“4AMLD”)[5].  In January 2018, EC Vice-President Dombrovskis welcomed this agreement, saying that the new rules mean “less anonymity and more traceability, through better customer identification, and strong due diligence.”[6]  These amendments bring custodian wallet providers (“CWPs”) and virtual currency exchange platforms (“VCEPs”) within the scope of the 4AMLD as obliged entities.  VCEPs and CWPs will be obliged to put in place policies and procedures to detect, prevent and report money laundering and terrorist financing.  The amendments only cover exchanges between virtual and fiat currencies; consequently, virtual-to-virtual currency exchanges fall outside the scope of the amended 4AMLD.

The final compromise text of the so-called 5AMLD still needs to be formally approved and signed by the Council and the European Parliament.  It will come into force 18 months after its publication in the Official Journal of the EU.  The 5AMLD is therefore expected to come into force by the end of 2019.

Horizon Prize for Blockchains for Social Good

In December 2017, the EC launched the €5 million worth European Innovation Council  Horizon Prize for “Blockchains for Social Good”, to be awarded in 2019.  In order to win the prize, participants will have to develop “scalable, efficient and high-impact decentralized solutions to social innovation challenges leveraging DLTs, such as the one used in blockchains”.[7]

Study on the Opportunity and Feasibility of a EU Blockchain Infrastructure

In November 2017, the EC launched a €250,000 study to assess the opportunity and feasibility of an EU Blockchain Infrastructure.  The EC’s objective is to identify “the right conditions for an open, innovative, trustworthy, transparent, and EU law compliant data and transactional environment”.[8]

Blockchain Observatory and Forum

In July 2017, the EC opened a €500,000 call for proposals to set up a European Expertise Hub on Blockchain and Distributed Ledger Technologies.[9]  The call for tenders ended on September 25, 2017, and the EC now plans to launch the EU Blockchain Observatory and Forum in the beginning of 2018.  According to the EC, “the observatory will map existing initiatives on blockchain, monitor related trends and developments, inform policy debates and inspire common actions based on specific use-cases.”[10]  Moreover, the EC intends to turn the EU Blockchain Observatory and Forum into a knowledge hub on blockchain, that should serve as an important communication tool setting out EU’s vision and ambitions for DLTs on the international scene.[11]

EU Policy Lab Blockchain4EU Project

In June 2017, the EC’s Joint Research Centre and the Directorate-General for Internal Market, Industry, Entrepreneurship & SMEs (“DG GROW”) launched the project “#Blockchain4EU: Blockchain for Industrial Transformations”,[12] which runs until February 2018”.  The project is a forward looking exploration of existing, emerging and potential applications based on Blockchain and other Distributed Ledger Technologies (DLTs) for non-financial industry sectors.[13]

European Commission Fintech Task Force

In November 2016, the EC set up an internal task force on financial technology[14] with three clear objectives: first, to make sure that all policy work across the board is informed by and takes account of technological innovation; second, to assess whether existing rules and policies are fit for purpose in the digital age; and third, to identify actions and proposals that could harness the potential opportunities fintech offers, while also addressing its possible risks.[15]  The EC indicates that the task force has been looking at the existing frameworks within EU Member States, talking to relevant stakeholders and considering the case for a coordinated European response. 

The European Parliament

A recent European Parliament (“EP”) Report on Virtual Currencies[16] stressed that virtual currencies and DLT have the potential to contribute positively to citizens’ welfare and economic development, including in the financial sector.  It also acknowledged their increased risks, and suggested that addressing these risks will require enhanced regulatory capacity, including technical expertise, and a sound legal framework that keeps up with innovation, ensuring a timely and proportionate response if and when the use of some DLT applications becomes systemically relevant.  However, the EP called for a proportionate regulatory approach at EU level, so as not to stifle innovation or add superfluous costs to it at this early stage – while taking seriously the regulatory challenges that the widespread use of virtual currencies and DLT might pose.

The European Central Bank

The European Central Bank (“ECB”) is keeping a careful eye on innovative fintech solutions, including DLT.  The ECB acknowledges the potential advantages of DLT, and has even created a special DLT task force which brings together market experts on financial innovation and cybersecurity.[17]  It also conducted a study on DLT that concluded that the ECB cannot yet consider basing its market infrastructure on a DLT solution because, at this stage, DLT is not mature enough to meet its high requirements in terms of safety and efficiency.[18]  However, it indicated that it will continue to explore DLT opportunities – and it has, for example, launched a joint research project with the Bank of Japan to study the possible use of DLT for market infrastructure services.[19]

Its 2015 paper on virtual currencies indicates that the ECB does not consider these to be a fully fledged form of currency as defined in economic literature.[20] However, the ECB noted that it will continue to monitor payments-related developments in virtual currency schemes.  In addition, in its Opinion on 4AMLD, the ECB warned that “the Union legislative bodies should, however, take care not to appear to promote the use of privately established digital currencies, as such alternative means of payment are neither legally established as currencies, nor do they constitute legal tender issued by central banks and other public authorities”.[21]  Finally, in September 2017, the ECB’s President criticized a proposal by the Estonian government to launch a state-managed digital currency.[22] 

The European Securities and Markets Authority

In 2017, the European Securities and Markets Authority (“ESMA”) published a report on Distributed Ledger Technology Applied to Securities Markets.  This acknowledges that there are benefits to adopting DLT and indicates that, as DLT applications are still at very early stage, they do not require regulation.[23]  ESMA also identified a number of challenges of DLT applications, including interoperability and the use of common standards, access to central bank money, governance and privacy issues, and scalability.  It also noted an absence of major impediments in the EU regulatory framework to the emergence of DLT in the short term.  It said it would continue to monitor market developments around DLT to assess whether a regulatory response may be needed.

Conclusions

The EU is looking seriously at the potential of blockchain and distributed ledgers technologies.  Its principal regulatory focus for blockchain and DLTs is on transparency and cybersecurity.  To date, it has taken a pro-innovation approach to blockchain technology and DLT, as a number of EU initiatives show, and many European institutions are of the opinion that it is still too early to regulate blockchain technology.  At this stage, it sees a need for more innovation, research, development, piloting and proof of concepts in order to facilitate uptake of the technology.[24]

As far as virtual currencies are concerned, Member States’ central banks do not consider virtual currencies to be equivalent to money, or legal tender.  This may create problems for  their users in the EU – for example, in cases of loss or fraud, there is no compensation or redemption mechanism. [25]  In addition, there has been no EU level regulatory guidance on ICOs and tokens.  However, with the current high profile of and interest in virtual currencies, the EU is likely to pay particular attention to them and their potential risks – and we can expect the EC at least to consider what regulation might be called for.

__________________

[1] See http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2016-009012&language=EN

[2] See https://blockchainlive.com/on-the-block/keen-eye-blockchain-interview-european-commissions-benoit-abeloos/

[3] See http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/579110/EPRS_BRI(2016)579110_EN.pdf

[4] See http://europa.eu/rapid/press-release_SPEECH-18-398_en.htm

[5] See http://ec.europa.eu/newsroom/just/item-detail.cfm?item_id=610991&utm_source=POLITICO.EU&utm_campaign=314d94f97e-EMAIL_CAMPAIGN_2017_12_15&utm_medium=email&utm_term=0_10959edeb5-314d94f97e-190085057

[6] See http://europa.eu/rapid/press-release_SPEECH-18-398_en.htm

[7] See https://ec.europa.eu/digital-single-market/en/blockchain-techonologies

[8] See https://ec.europa.eu/digital-single-market/en/news/study-opportunity-and-feasibility-eu-blockchain-infrastructure

[9] See https://ec.europa.eu/digital-single-market/en/news/eu-blockchain-observatory-and-forum.

[10] See https://ec.europa.eu/digital-single-market/en/blockchain-techonologies

[11] Ibid.

[12] See http://blogs.ec.europa.eu/eupolicylab/portfolios/blockchain4eu/

[13] Ibid.  More information on concrete projects that the EU Policy Lab’s Blockchain4EU Project runs can be found here: https://blogs.ec.europa.eu/eupolicylab/

[14] See http://ec.europa.eu/newsroom/fisma/item-detail.cfm?item_id=56443&utm_source=fisma_newsroom&utm_medium=Website&utm_campaign=fisma&utm_content=Task%20Force%20on%20Financial%20Technology&lang=en

[15] See http://ec.europa.eu/newsroom/fisma/item-detail.cfm?item_id=56443&utm_source=fisma_newsroom&utm_medium=Website&utm_campaign=fisma&utm_content=Task%20Force%20on%20Financial%20Technology&lang=en

[16] See http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+REPORT+A8-2016-0168+0+DOC+XML+V0//EN

[17] See https://www.ecb.europa.eu/paym/initiatives/shared/docs/dlt_task_force_mandate.pdf

[18] See https://www.ecb.europa.eu/pub/annual/special-features/2016/html/index.en.html

[19] See https://www.ecb.europa.eu/paym/intro/news/shared/20170906_stella_report_leaflet.pdf

[20] See https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf.

[21] See https://www.ecb.europa.eu/ecb/legal/pdf/en_con_2016_49_f_sign.pdf

[22] See https://www.reuters.com/article/us-ecb-bitcoin-estonia/ecbs-draghi-rejects-estonias-virtual-currency-idea-idUSKCN1BI2BI

[23] See https://www.esma.europa.eu/sites/default/files/library/dlt_report_-_esma50-1121423017-285.pdf

[24] See https://ec.europa.eu/digital-single-market/en/news/information-day-horizon-2020-blockchain-distributed-ledger-technologies-topics-and-fintech

[25] See http://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2016)579110