On March 23, 2017, the European Commission (“EC”) published a Consultation Document entitled “FinTech: A More Competitive and Innovative European Financial Sector.” The Consultation Document seeks comments regarding the development and regulation of novel financial technologies, including distributed ledger technology (“DLT” or “blockchain”), cloud computing, and artificial intelligence (“AI”). The EC hopes to obtain feedback from both financial services providers and consumers that will assist it in developing an appropriate regulatory framework for FinTech. It explains, in the Consultation Document, that “appropriate policies on important issues, such as access to technology, data standardisation and security, personal data protection and data management, need to be put in place,” to account for new innovative financial technologies.
In the Consultation Document, the EC sets forth three “core principles” for regulating FinTech: technological neutrality, proportionality, and market integrity. First, technological neutrality is meant to facilitate the application of the same regulations to the same activities, irrespective of the way that a particular service is delivered. Second, regulation will be proportional to reflect the business model, size, systemic significance, as well as the complexity and cross-border activity of the regulated entities. Finally, the EC will aim to enhance market integrity by encouraging market transparency to the benefit of consumers and businesses without creating unwarranted risks. To assist the EC in effecting its policy goals, the Consultation Document requests comments on various technologies within the FinTech universe, including AI, DLT, RegTech, crowdfunding, data analytics, and cloud computing.
Based upon the descriptions in the Consultation Document, the EC appears generally quite optimistic regarding the potential for FinTech, and particularly DLT, to improve financial services than certain other regulatory bodies, such as the European Securities Markets Association and the Financial Industry Regulatory Association, which both requested similar comments from industry participants earlier this year. For example, with respect to DLT, the EC states that “DLT systems could enhance efficiencies and lower costs by improving processes and making resource-intensive back-office functions redundant. It may also make regulatory reporting more resilient and faster. In the longer run, DLT systems could also disintermediate many market players, further reducing transaction costs.” However, in keeping with other regulators’ reports, the EC noted potential legal issues intertwined with the development of DLT, including jurisdictional questions and the issue of legal recognition that distributed ledger data is true and accurate, and has legal value.
The EC also expressed concern that DLT may give rise to data privacy issues. It noted that, “[w]hile DLT offers the potential to generate advantages in terms of transparency and flexibility, it may also give rise to challenges in terms of personal data protection and data security.”
As was the case with the recent FINRA, ESMA and IOSCO reports and questions for industry, this EC initiative provides DLT companies with an excellent opportunity to assist governmental entities in crafting regulatory regimes that best connect the innovative technologies with regulatory and industry goals. Those developing or using DLT applications for the financial industry should consider commenting, at a minimum, in addition to approaching and working with regulators to ensure the best results in any ultimate technology-focused regulation.
The EC requests that all comments be submitted by June 15, 2017. If you are interested in submitting comments individually or through an industry group, such as the Chamber of Digital Commerce, please contact Kari S. Larsen at email@example.com or Michael S. Selig at firstname.lastname@example.org.
The Consultation Document is available here.