On 3 October 2018, the European Parliament adopted a non-legislative resolution on distributed ledger technology (DLT) and blockchain. The resolution discusses potential benefits from the application of DLT in various sectors of the economy, including financial services, and sets out the suggested regulatory approach.
DLT benefits and potential applications
Building trustworthy decentralisation through DLT may produce important social benefits, including allowing citizens to have better control over their data, reducing the need for intermediaries and consequently lowering transaction costs, increasing transaction transparency and allowing peer-to-peer exchange of value.
DLT has a number of potential applications in key sectors of the economy, such as energy and environmentally-friendly applications, healthcare, supply chains, transport, education, creative industries and copyright. Additionally, the European Parliament emphasises the strategic importance of DLT for improving the quality of public services and public infrastructure, for instance through digitalisation and decentralisation of public registries.
Financial Services, Smart Contracts and Initial Coin Offerings
With regards to financial intermediation, DLT could improve the management of data and streamline processes towards enhancing transparency, while reducing both transaction and hidden costs. The European Parliament emphasises the interoperability challenges in this respect, welcomes the work of major financial institutions in conducting research and experimenting on the potential applications of DLT and calls the Commission to continue its monitoring efforts on the relevant developing trends and use-cases.
However, the European Parliament also highlights the volatility and uncertainty relating to cryptocurrencies as well as the need to further explore the feasibility of using cryptocurrencies as alternative methods of payment and transfer of value. It calls the Commission and the European Central Bank (ECB) to look into the sources of volatility, identify dangers and consider the possibility of incorporating cryptocurrencies into the European payment system.
The European Parliament emphasises the need to assess the legal implications of smart contracts and ensure legal certainty, for instance around the validity of a digital cryptographic signature. To this end, it encourages the development of technical standards on the enforceability of smart contracts.
Initial Coin Offerings (ICOs) can potentially be an alternative source of funding for SMEs and innovative start-ups, however the legal framework is not clear in this area. Therefore, the European Parliament invites the Commission to examine ways to enhance investor protection, focusing in particular on disclosure requirements and obligations for issuers, as well as to explore how this asset class could be blended with other financial vehicles, in the context of building a Capital Markets Union. It also calls the Commission to create an Observatory for the Monitoring of ICOs and suggests the development of a model framework of regulatory sandboxes and a code of conduct.
According to the European Parliament, the Union “has an excellent opportunity to become the global leader in the field of DLT“. To foster the possibilities and opportunities of DLT, an innovation-friendly, enabling and encouraging legal framework, developed on the basis of the principle of technology neutrality is necessary. This framework would promote legal certainty and transparency and provide for the necessary safeguards to ensure consumer, investor and environmental protection and facilitate efforts to prevent and combat corruption, tax evasion, unlawful payments, anti-money laundering and misappropriation of assets. The European Parliament welcomes the current approach not to regulate DLT directly, but urges for the removal of the existing barriers to the implementation of blockchain.