The European Union's Emergence as a Global Hub for Blockchain Technology and Digital Assets
Introduction: EU understanding DLT & Digital Assets opportunity
Distributed Ledger Technology (DLT) such as blockchain, and digital assets have been significant topics in the last decade, and especially in recent years. That’s not something surprising to people who understand why DLT is a highly disruptive technology with the potential to revolutionize all industries and sectors, however, its popularity during its first years was due more to speculation with the use of digital assets and always on the edge of legality and in the crosshairs of regulators and institutions.
Initial Coin Offerings (ICOs), for the issuance of utility tokens without any regulation, emerged after the successful global issuance of Ethereum′s blockchain in 2014, which allowed developers to create new applications and projects using blockchain technology. In that year numerous ICOs were launched successfully within a short period of time, and it became even more popular during 2016. Unfortunately, the ease with which money was raised also attracted market participants with bad motives who took advantage of the unregulated ICO market to scam investors. However, this is something that has changed in recent years, specially with the growing interest for Security Token Offerings (STOs) and companies of all types are recognizing the benefits of this technology for different use cases under a regulated environment.
Now, we are seeing the number of corporates, small companies and startups taking advantage of this technology growing steadily, and it is not for nothing, especially in applications related to leveraging this technology for tokenization and Digital Assets, as predictions about the growth of the sector are significant:
Citi GPS studies state that by 2030 the market size of tokenized assets will be between 4 and 5 trillion dollars, with special interest in private markets, where 10% of the assets in this sector will be tokenized, representing an opportunity of 0.7 trillion dollars.
In addition, Northern Trust and HSBC also forecast great growth for digital assets, predicting that by 2030 between 5% and 10% of all assets will be tokenized and operated under DLT technology.
As for the TAM for Blockchain technology with all its use cases, Citi GPS estimates a CAGR of over 75% between 2022 and 2027, reaching $147 bn in that year.
Well, the European Union is aware of this and has bet heavily on it. It seems that the intention is clear; to turn the European Union into a technological hub for the development of digital assets.
It is impossible for its activity to go unnoticed, especially if we compare it with the activity that is taking place in other jurisdictions, as we can see outside the EU where it is not just that the development is not being supported as much as in Europe, but in some jurisdictions all the activity related to Digital Assets is even being prohibited. The main initiative that demonstrates this EU support is the Digital Finance Package, adopted by the European Commission in September 2020 to support the digital transition while mitigating potential risks and turning Europe into a global digital player. This package included a digital finance strategy, a retail payments strategy, and some legislative proposals on digital assets and digital resilience. The main goals of the European Commission with this initiative were to boost Europe’s?competitiveness?and?innovation?in the financial sector, to give consumers and businesses?more choice?in financial services and modern payment solutions and to ensure?consumer protection?and?financial stability. Mainly driven by this Digital Finance Package initiative, we can identify three key factors to understand how Europe is positioning itself in this way compared to other jurisdictions:
New Regulations
As part of the Digital Finance Package, the European Commission has introduced three key regulations aiming to position Europe as a global leader in innovation and development of digital assets and DLT.
European Markets in Crypto-Assets Regulation (MiCA)
Adopted on April 20, 2023, by the European Parliament, MiCA is the first and only legislation of its kind in the world and leads the way for other jurisdictions. MiCA will enter into force at some point between mid-2024 and early 2025, and It brings crypto-assets, crypto-asset issuers and crypto-asset service providers under one regulatory framework for the first time.
The framework covers issuers of unbacked crypto-assets and so-called ‘stablecoins’, as well as the trading venues and wallets where crypto-assets are held. The new rules aim to better protect investors and regulate risks related to crypto-assets whilst boosting innovation and strengthening the EU’s role as standard-setter for digital policy.
Crypto-asset service providers will need an authorization to operate in the EU. They will have to respect strong requirements to protect consumers wallets and will be held liable if they lose investors crypto-assets. The European Banking Authority (EBA) will maintain a public register of non-compliant crypto-asset service providers.
Pilot Regime for market infrastructures based on DLT
The DLT Pilot Regime is an important milestone in the development of digital assets and tokenization in the EU. It is is a regulatory sandbox that allows eligible firms to operate DLT Market Infrastructures to operate with DLT financial instruments, which are financial instruments that are issued, recorded, transferred, and stored using DLT and are within the meaning of Directive 2014/65/EU on markets in financial instruments (MiFID II). It was approved on March 28th, 2022, and in entered into force on March 23rd, 2023.
Its goal is to facilitate the development of a secondary market infrastructure for digital securities, help EU regulators gain experience with DLT, and assess the changes that may be needed or beneficial to the current regulatory framework for the use of DLT.
The DLT Pilot Regime allows three types of market infrastructures to operate financial instruments:
?The assets that can be tokenized to be operated under this DLT Pilot Regime are:
?In addition to this limitations, there are others that limit ?the aggregated market value that each infrastructure can support for trading or have registered:
In case of exceeding the limit of 9 billion euros, the market infrastructure strategy based on DLT must be applied for the transition to traditional market infrastructures.
Digital Operational Resilience Act (DORA)
As the financial sector becomes more dependent on digital processes and software, there are increased risks associated with disruption and threats to information and communication technology systems. It is expected to enter into force early 2025.
The Digital Operational Resilience Act (DORA) will make sure that the European financial sector can cope with severe operational disruptions. DORA sets uniform requirements for the security of network and information systems of companies and organizations operating in the financial sector as well as critical third parties which provide ICT-related services to them, such as cloud platforms or data analytics services. All firms need to make sure they can withstand, respond to and recover from ICT-related disruptions and threats.
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Digital Euro
The European Union has been working on the development of the Digital Euro since the end of 2020, with the aim of having the possibility to maintain the economic sovereignty in the digital world. The digital euro would be a digital form of central bank money for retail use, in addition to cash. As public money, it would be guaranteed by the European Central Bank.
Despite currently being in the research phase, the euro digital project was one of the first CBDC projects to begin its development. Compared to CBDC projects that have already been launched in regions such as Nigeria, Jamaica, or some Caribbean countries, or advanced pilot projects like Digital Yuan in China, the Digital Euro is being carried out at a slow pace with well-defined investigations and timelines to ensure that the final project truly meets the needs of citizens.
In October 2020, the ECB published a report that examined the possible issuance of a central bank digital currency denominated in euro. The report was prepared by experts from the ECB itself and from the national central banks of the euro area. From October 2020 to January 2021, the ECB also ran a public consultation on the benefits and possible design of a digital euro.
In July 2021, the ECB launched the investigation phase of the digital euro project. This phase focuses on key issues relating to the design and distribution of a possible digital euro and includes a prototyping exercise.
The investigation phase of the digital euro project will conclude in October 2023. The Governing Council of the ECB will decide whether to move to the realisation phase of the digital euro in autumn 2023. During the realisation phase, which could take around three years, the digital euro would actually be developed, however, the start of the realisation phase does not necessitate the definitive launch of the digital euro.
In July 2021, the ECB launched the investigation phase of the digital euro project. This phase focuses on key issues relating to the design and distribution of a possible digital euro and includes a prototyping exercise.
The investigation phase of the digital euro project will conclude in October 2023. The Governing Council of the ECB will decide whether to move to the realization phase of the digital euro in autumn 2023. During the realization phase, which could take around three years, the digital euro would actually be developed, however, the start of the realization phase does not necessitate the definitive launch of the digital euro.
The most recent updates that we have from the Digital Euro were shared in the last Eurogroup meeting on June 15th.
As ECB says, the need for a Digital Euro stems from its ability to fulfill multiple crucial purposes. Firstly, it would provide a universal digital payment option for individuals throughout the euro area, ensuring seamless transactions across borders. Secondly, in the digital age, it would protect the role of public money by digitizing the euro and maintaining its position as a stable foundation for the financial system. Additionally, a Digital Euro would serve as a European platform for innovation, enabling intermediaries to create and offer instant services to customers across Europe, promoting competition and meeting evolving consumer needs. Moreover, its introduction would enhance the resilience of European payments and bolster strategic autonomy by reducing reliance on non-European payment systems, thus ensuring the security and control of the region's financial transactions.
The Digital Euro would bring benefits to all parts of society: Citizens, merchants and intermediaries. First, it would bring an additional European means of payment, while ensuring privacy and access of all citizens. For merchants, it would be a cost-effective option, while increasing resilience and strengthening negotiating position. Lastly, for intermediaries it would offer the possibility to offer services with euro area reach and its distribution to end users.
Among key features of the digital euro, the European Central Bank specifies that It would complement, rather than substitute, cash and also that it would be able online and offline.
Regarding some of the issues that have been most criticized and of concern to society, the European Central Bank clarifies that at no time will it be programmable money in terms of limiting who, when or what a person can use it for.
As for privacy, the ECB also specifies that it will ensure high levels of privacy, and that the ECB has no interest in the private information of its users.
Other initiatives & Activity in the UE
Among the initiatives or activities being carried out in the European Union, we find significant institutions exploring the tokenization of assets for issuing financial instruments using DLT. Additionally, there have been significant advancements in using DLT for managing citizens' digital identities.
Since 2021, the European Investment Bank has conducted three issuances of tokenized financial instruments to explore this technology and different methods for issuing and operating them.
Important European financial institutions have also sought to explore the benefits of this technology, and in recent years, we have witnessed their issuance of tokenized financial assets. Notable among them are institutions from Germany, France, Spain and Switzerland.
Despite not being part of the European Union, it is worth mentioning Switzerland as it has become one of the reference places for the development of this type of projects. Its advanced regulation and favorable for innovation with DLT has attracted the interest of developers and investors from all over the world. Here we find, close to the city of Zurich, what is known as Crypto Valley, one of the leading ecosystems for the development of DLT technology with innovative companies in this space. It presents itself as a Swiss national ecosystem with active connections to international blockchain innovation centers in London, Singapore, Silicon Valley and New York.
Another example of Europe's commitment to developing DLT technology and tokenization is the initiative called Tokenise Europe 2025. This initiative aims to drive the adoption of tokenization and position the European Union as a global leader in the sector while safeguarding its sovereignty. Founded by the European Commission in collaboration with the Association of German Banks, Tokenise Europe 2025 has attracted 20 firms to join the association, with Germany, Spain, and Liechtenstein taking the lead. Notable participants include global banks such as BBVA, Commerzbank, Deutsche Bank, and Santander, as well as major industrial companies like Daimler Trucks, Renault, and Repsol. In addition to the German banking association, its counterparts from Italy and Liechtenstein are involved as well as payment firms Iberpay and Worldline.
Finally, and somewhat outside the range of digital assets but based on blockchain technology and with great importance due to its potential impact is the initiative for the management of Digital Identity by the European Commission. Blockchain technology enables users to possess personalized digital identity wallets, empowering them to authenticate and exchange their data while safeguarding their privacy and ensuring robust security measures.
According to the European commission, The European Digital Identity will be available to EU citizens, residents and businesses wishing to identify themselves or confirm certain personal information. It can be used to access services, both public and private, online and offline, throughout the EU. All EU citizens and residents will be able to use a personal digital wallet.
EU citizens will have the option of a digital identity wallet provided free of charge at Member State level for use throughout the EU, instead of simply products supplied by the private sector, according to an amendment adopted in the framework of the processing of the Proposal for a European Regulation amending Regulation (EU) No. 910/2014 as regards the establishment of a Framework for a European Digital Identity, usually referred to as eIDAS 2 (acronym for Electronic Identification, Authentication and Trust Services). Indeed, the fundamental novelty of the forthcoming eIDAS 2 Regulation is to introduce a European digital identity wallet. It consists of a product and service that allows the user to store identity data, credentials and attributes linked to his identity, in order to provide them to user parties on request and to use them for authentication purposes, for a service in accordance with the provisions of the new Article 6a, as well as to create qualified electronic signatures and seals. Their use will, however, be voluntary.
The eIDAS 2 Regulation aims for the European Union to become the first global region with a governance framework for trusted digital identities. The European digital identity wallet represents a trusted identity gateway, putting citizens in full control of their own data and giving them the freedom to decide exactly what information to share, with whom and when. From social, financial, medical and professional data to contacts and much more, the forthcoming wallet will allow personal credentials to be stored in a single digital identity document. It is intended, in short, to be a tool for the social empowerment of European citizens.
Conclusions: What can we expect now?
To conclude, I would like to make a small reflection on how all the above may affect the European Union in the medium to long term and the impact it may have. There is no doubt that in Europe we are on the right track with the measures adopted, and the impact at a socio-economic level can be high, and help to strengthen the figure of the euro not only through the important digital euro project that is being developed, but also with an important movement on the part of industry and innovation from regions such as the USA or Asia where these types of companies have traditionally established, to turn around and turn Europe into the new center of technological development, innovation and entrepreneurship. Undoubtedly, the opportunity ahead of us is enormous, and we in Europe have everything we need to take advantage of it.