Digitalization & Level Playing Field
What is it about?
The digital revolution and its new technologies are changing the world fundamentally. Private and business lives are impacted dramatically. In this phase, Europe must make the best use of digitalization to maintain competitiveness and global future readiness in a world where all the interrelated digital solutions are in play. As users, product providers, innovators and financers, banks can facilitate these developments, provided an adequate regulatory framework.
What is the issue?
- Future Digital Currencies will consist of public central bank digital currencies (CBDCs) and private (stable coin) solutions. From a bank’s perspective both the wholesale (in the interbank business) and retail CBDCs are important. However, especially as regards retail CBDCs, the design choices need to be extremely carefully balanced to avoid among other things increasing cost of funding in case of diminishing deposits (= less economic growth, profits, jobs, and tax revenues) and in general to keep the financial system stable. In an extreme case, depositors might be willing to escape the commercial banking system for the safety of central bank liabilities.
- Crypto Assets can bring many opportunities for financial market participants. However, similarly to CBDCs, if not treated the proper way, they could have unintended consequences. Major concerns include consumer protection, money laundering, carbon footprint and an unlevel playing-field for banks vis-à-vis Fintechs who take on also less regulated (and therefore potentially riskier) activities.
- Currently, the EU eID landscape is scattered. Some advanced national solutions might be incompatible with the future EU framework, creating inconvenience, complexity, unlevel playing field and potential security lacks. While welcoming the framework for a Digital Identity proposed by the Commission, some important aspects remain unclear (e.g. liability of individual parties).
- With regards to Artificial Intelligence, we should remain vigilant to ensure that European companies are not more constrained than international competitors. Over-regulation in this context could put whole industries at stake and pose risks in a field that needs the fostering of innovation instead of red tape.
- The new digital finance market will not be viable unless fragmentation is tackled, level playing field is ensured and regulatory framework will be both technology neutral and innovation friendly. With regards to a level playing field it is also of utmost importance to ensure a harmonization of the EU and third country legislation.
What could be done more?
- The design of CBDCs must be accepted by the public. It shall ensure that CBDCs are used only to the precisely desired extent (e.g., by limiting the amount of a CBDC one user may have in a wallet). With regards to retail CBDCs, it is of utmost importance to maintain the 2 tier model between central bank(s) & commercial banks: ECB provides basic infrastructure and handles steering/monitoring as before. Commercial banks handle AML, KYC and innovation. Specifically, with regards to the Digital EUR it is important to ensure a global availability of the digital EUR and interoperability with other digital currencies. We support more initiatives in the wholesale CBDC area.
- A clear understanding and classification of different Crypto Assets (CA) categories is required to ensure proper regulation and supervision to reflect characteristics and risks. For different categories of CAs (cryptocurrencies, tokenized assets, stable coins) we recommend a customized kind of regulatory treatment and consider all consequences. Markets in CA Regulation (MiCA) legislative proposal is attempting to bring CAs to a similar standard, as that which already applies to financial instruments, which brings legal certainty and uniformity of rules and is therefore a welcome step. In the legislative process it is important to ensure that both consumers and banks benefit from safeguards in the future CAs regulation.
- Digital Identity:
- 1.) cooperation between public and the private sector is key when developing the European Digital Identity Framework. Particularly banks are experienced in validating identities.
- 2.) The eID framework should acknowledge solutions already existing in the Single Market and extend their usability to the private sector (interoperability).
- 3.) The eID framework should clarify: i) liability/accountability, ii) inclusivity (= neutral access for all customer groups) and iii) authority (to act).
- Artificial Intelligence (AI): Any new regulation on AI mustn’t add new and innovation-stopping requirements or create conflicts and overlap with existing rules. Full clarity is also needed for instance with regards to the interaction with the existing regulatory framework.
- To ensure a Level Playing Field for all market participants it is important to preserve the principle ‘same services, same risks, same rules’, regardless of the technology or business model through which they are provided.