Digital Assets Digest December

European Commission: Keynote address of Mairead McGuinness at the 5th ESRB annual conference

On 8 December 2021, the European Commission published a speech given by EU Commissioner, Mairead McGuinness, at the 5th ERSB annual conference. The speech touched on many issues. It stresses the importance of regulators being open to assessing the full potential of DLT but also acknowledges the importance of understanding the role crypto economy can pose to financial stability. She argues that crypto-based derivatives are gaining traction and that crypto is moving from the periphery into the mainstream. She refers to progress being made by EU co-legislators in respect of the Regulation on Markets in Crypto Assets and argues that the regime is designed to capture risks to consumers, market integrity, financial stability and monetary sovereignty.

BIS: Report on cross-border settlement using wholesale CBDC

On 8 December 2021, BIS issued a report in respect of Project Jura (a public private collaboration involving the Banque de France, the BIS Innovation Hub, Swiss Centre and the Swiss National Bankand a consortium) which explored the direct transfer of euro and Swiss franc wholesale central bank digital currency (wCBDC) between French and Swiss commercial banks on a single DLT platform operated by a third party. The project involved the use of a tokenised asset, and foreign exchange trades were settled using payment versus payment (PvP) and delivery versus payment (DvP) mechanisms. The project is intended to complement the ongoing work of the G20 concerning cross border payments by contributing to the building blocks identified in the G20 roadmap (e.g. PvP adoption). BIS states that also Project Jura complements earlier and ongoing BIS projects exploring the use of wCBDC in cross border payments and settlements.

European Parliament: Briefing on central bank digital currencies

On 7 December 2021, the European Parliament issued a briefing on central bank digital currencies. The European Parliament and other participants are expected to participate in the investigation phase of the digital euro project launched by the ECB in July 2021. The briefing explores key aspects of CBDC and covers topics such as: early attempts; design choices; potential benefits; potential risks; latest evolutions at international level; and legal risks.

FSB: Speech by Klaas Knot on 10 years since the FSB’s Key Attributes

On 7 December 2021, the FSB issued a speech by new FSB chair, Klaas Knot. The speech marks ten years since the adoption of the “Key Attributes of Effective Resolution Regimes”. Mr Knot states that the Key Attributes hold broader lessons in relation to the supervision of the financial system. He states that most new challenges facing the global financial system cut across sectors and jurisdictions and he refers to initiatives such as the roadmap to enhance cross-border payments and the FSB's high-level recommendations on stablecoins as examples of initiatives that aim to promote globally adopted and globally consistent solutions to global challenges.

BIS: Quarterly Review - International banking and financial market developments

On 6 December 2021, BIS published its Quarterly Review. The review touches on a number of areas, including decentralised finance. Decentralised finance (DeFi) aims to provide financial services without intermediaries, using automated protocols on blockchains and stablecoins. The review states that there are aspects of DeFi that are causing concern in relation to investor protection (as well as other matters).The review refers to a “decentralisation illusion” in relation to DeFi that ignores the need for centralised governance.

BoE: Minutes of the CBDC Engagement Forum - November 2021

On 6 December 2021, the Bank of England published the minutes for the CBDC Engagement Forum held in November 2021. In the meeting, attendees discussed the Forum's forward agenda of potential topics to be discussed at future meetings. Members discussed the interoperability of CBDC with other payment rails, both domestically and cross-border, as well as with other forms of digital money (e.g. privately issued stablecoins). The Forum also discussed the potential benefits of a retail CBDC and on approaches to end-user research, with the Bank and HM Treasury looking for input on different approaches to researching user needs and assessing consumer appetite for product innovations.

Council of EU: Negotiating mandate on proposed Regulation on information accompanying transfers of funds and certain cryptoassets

On 1 December 2021, the Council of the EU published a press release announcing a mandate had been agreed to negotiate with the European Parliament on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets (2021/0241(COD)). The legislative proposal was introduced in July 2021 by the European Commission as part of a package of anti-money laundering and countering terrorism financing rules. The aim of the proposal is to introduce an obligation for cryptoasset service providers to collect and make accessible full information about the sender and beneficiary of the transfers of virtual or crypto assets. The Council's position aims to synchronise the application of the proposal on transfer of funds and the proposed Regulation on markets in cryptoassets. The Council has also published an "I" item note (14259/21).

ECB: Opinion on proposed Regulation on information accompanying transfers of funds and certain cryptoassets

On 1 December 2021, the European Central Bank (ECB) published an opinion (CON/2021/37) on the legislative proposal for a Regulation on information accompanying transfers of funds and certain cryptoassets (2021/0241(COD)).

The Opinion supports the aim of extending traceability requirements to cryptoassets, as the ECB considers that cryptoasset transfers are subject to similar money laundering and terrorism financing risks as wire funds transfers. In the Opinion, the ECB suggests amendments to the legislative proposal including the definition of cryptoassets, as well as the date of application. The ECB suggests that the Regulation should apply from the same date as MiCA.

European Commission: Consultation on macro-prudential framework for EU banks

On 30 November 2021, the European Commission published a consultation document relating to a targeted consultation on improving the EU's macro-prudential framework for the banking sector, as outlined in the Capital Requirements Regulation. One of the topic areas in the consultation is global and emerging risks and the document notes that the Commission is assessing the effectiveness of the framework in the light of emerging risks such cryptoassets.

Law Commission: Update on emerging technology projects relating to smart contracts, digital assets and conflict of laws

On 25 November 2021, the Law Commission provided an update on three of its emerging technology projects relating to smart contracts, digital assets and conflict of laws.

Key aspects

• Smart contracts. The Law Commission confirms previous opinions that the existing law of England and Wales can support the use of smart legal contracts, without the need for statutory law reform.
• Digital assets projects. The Law Commission also published a short update paper on its digital assets project, confirming that digital assets project will not be completed until the middle of 2022.
• Conflict of laws. The Law Commission states that the problem of "digital location" (i.e. pinpointing real-world locations to digital actions and digital objects) is significant challenge for private law to overcome.

For more information, please see Ashurst briefing.

Council of EU: Position adopted on MICA

On 24 November 2021, the Council of the EU published an "I" item note containing a mandate for negotiations with the European Parliament on the proposed Regulation on markets in cryptoassets (2020/0265 (COD)) (MiCA). In the accompanying press release, the Council of the EU explains that it and European Parliament will now enter trialogue negotiations on the proposals.

European Parliament: Political agreement reached on proposed Regulation on pilot regime for market infrastructures based on DLT

On 24 November 2021, the European Parliament announced that a political agreement had been reached between it and the Council of the European Union on the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) (2020/0267(COD)). The Commission adopted the proposed Regulation in September 2020 as part of its Digital Finance Strategy.

BoE: Speech by Victoria Cleland on working together to enhance cross-border payments

On 22 November 2021, the Bank of England issued a speech by Victoria Cleland, Executive Director for Banking, entitled "Payments and Innovation: Working together to enhance cross-border payments".

Key points

• Cross-border payments. Ms Cleland states that challenges remain in this area relating to high costs, limited access and insufficient transparency. She states that the industry should note the FSB's first consolidated progress report on the G20-endorsed roadmap for enhancing cross-border payments and the G20's October 2021 re-confirmation of its commitment to enhancing cross-border payments.
• Areas for central banks. Ms Cleland argues that central banks need to improve their own core payment systems. She stresses the importance of collaboration between the public sector and private sector to prepare for changes in the payments landscape. She argues that the role of the private sector will include responding to consultations and working closely with organisations leading work on the roadmap to help to shape policy and guidelines.

Eurosystem: Oversight framework for electronic payment instruments, schemes and arrangements (PISA framework)

On 22 November 2021, the new Eurosystem oversight framework for electronic payment instruments, schemes and arrangements (PISA framework) was published. The new framework replaces the “Harmonised oversight approach and oversight standards for payment instruments” and all related oversight frameworks for cards, direct debits, credit transfers and the security objectives for e-money. The criteria the Eurosystem reviews when deciding on the application of the PISA framework to a scheme/arrangement are defined in the exemption policy for implementing the framework.

The framework is intended to complement the Eurosystem’s oversight of payment systems, as well as future EU regulations on cryptoassets (including stablecoins) and international standards for global stablecoins. It will cover cryptoasset-related services, such as the acceptance of cryptoassets by merchants within a card payment scheme and the option to send, receive or pay with cryptoassets via an electronic wallet.

Entities already subject to Eurosystem oversight are expected to adhere to the principles of the new framework by 15 November 2022.

BIS (CPMI): Consultative report - Extending and aligning payment system operating hours for cross-border payments

On 18 November 2021, the BIS (CPMI) issued this consultative report into extending and aligning payment system operating hours for cross-border payments. This has been issued as part of the G20 cross-border payments programme.

The extension and alignment of operating hours of key payment systems to allow overlapping was identified as Building Block 19 in the 2019 review into challenges facing cross-border payments.

The report looks at operating hours of real-time gross settlement (RTGS) systems and how an extension of RTGS operating hours could address current obstacles, increase the speed of cross-border payments and reduce liquidity costs and settlement risk.

The deadline for comments is 14 January 2022.

FSB: November 2021 Plenary Meeting

On 18 November 2021, the Financial Stability Board published a press release following its plenary meeting in Basel. It confirms that one of the priorities for the FSB’s work will include containing the risks from the use of crypto technology, including unbacked crypto-assets, stablecoins and decentralised finance (while harnessing the benefits). It was confirmed that the FSB will provide an updated assessment of the financial stability implications of cryptoassets to the G20 in February 2022.

ECB: Speech by Fabio Panetta: Designing a digital euro for the retail payments landscape of tomorrow

On 18 November 2021, the ECB issued a speech by Fabio Panetta in relation to the digital Euro. Mr Panetta argues that a considered and measured approach will be necessary to ensure that central bank money remains the anchor of stability.

Key issues

• Maintaining the role of central bank money in the digital age. The ECB wants to ensure that access to cash is maintained but also wants to be able to respond to the changing payments landscape.
• Designing a retail central bank digital currency. Mr Panetta refers to the role played by TARGET services in providing access to central bank money and adds that the digital euro money project is about investigating whether access can be opened up and central bank money can be used in digital form for daily transactions.
• Making the digital euro attractive to consumers. The ECB plans to elicit views via country focus groups and consultations involving the public, merchants and other stakeholders during the investigation phase of the Digital Euro. It is also engaging with the with EU bodies such as the European Parliament, the European and the European Commission on major design issues and policy issues.

European Commission: Call for advice to EBA on PSD2 review

In November, the European Commission issued a call for advice to the EBA in relation to PSD2. The review of PSD2 was announced in Retail Payments Strategy, which was issued as part of the European Commission's September 2020 Digital Finance Package. The Commission is required to submit a report to the EU co-legislators and others on the application and impact of PSD2, together with a legislative proposal if appropriate. The EBA will be asked to deliver its advice to the European Commission by 30 June 2022. One of the areas that the EBA will be asked to consider is whether it has looked at any specific issues in the interplay between PSD2 and forthcoming legal acts (e.g. MiCA).

ECB: Financial Stability Review

This review, published by the ECB on 17 November 2021, states that the economic recovery in the euro area has reduced near-term pandemic-related risks to financial stability. It states that immediate risks have decreased but some sectors still face challenges. The report states that "exotic segments" such as cryptoassets are prone "to speculative bouts of volatility". The report refers to the development of a crypto-based market infrastructure/“decentralised finance” and argues that this has made cryptoasset markets more complex. The review contains a report titled "The expanding functions and uses of stablecoins". Key issues raised in this section are that: the market capitalisation of stablecoins has risen and they are serving increasingly different functions in the cryptoasset ecosystem; current high transaction fees on certain blockchains restrict the use of stablecoins as a form of payment; stablecoins are exposed to similar vulnerabilities as money market funds, and there is currently a lack of transparency regarding stablecoins’ reserve assets; and stablecoins currently pose limited financial stability risks in the euro area, but regulatory initiatives such as the EU MICA are an important step in setting up an appropriate regulatory, supervisory and oversight framework.

European Commission: Keynote speech by Mairead McGuinness at European Payment Institutions Federation Annual Conference

On 16 November 2021, the European Commission issued this speech by EU Commissioner, Mairead McGuinness given at the European Payment Institutions Federation Annual Conference.

Notable points

• Instant payments. Ms Guinness states that the EU wants to be among the global leaders in the area of payments and argues that instant payment providers need to be able to count on EU-wide rules and effective infrastructures. She confirms that the European Commission has identified four major roadblocks in relation to instant payments.
• Central bank digital currencies and the digital euro. Ms McGuinness refers to the impact of COVID-19 on payment habits and the increasing reliance on digital payment options. She refers to efforts by a number of countries to develop digital currencies and confirms that the European Commission is working closely with the ECB on the impact of the digital Euro.
• International payments beyond the EU. Ms McGuinness states that the EU wants to ensure that EU rules enable fast, low-cost cross border payments and that this should have a positive impact on remittances. She also states that stablecoins could become a channel for remittances.

ECB: Presentation on implications of digital currencies

This ECB presentation, dated 9 November 2021, considers a number of areas in relation to central bank currencies, in particular the digital Euro. Areas covered are: what is meant by a digital euro and why consider introducing one; monetary policy considerations; financial stability considerations; safeguards and mitigation measures; and international macro-financial implications.