EU financial services: digital perspectives

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Most productive EU-wide attention to digital-type financial services dates back to consultations on fin-tech in 2017 devoted to facilitating a more competitive and innovative European financial sector. Then around 2021, the central banks digital currency, CBDC has become a hot issue: several central banks around the world were considering options of adopting virtual currencies. However, a final decision on practical digital euro’s introduction is still under discussion… 

Background
In simple terms, the CBDC is regarded as either a digital banknote used by individuals to pay for purchases and services (the so-called retail CBDC), or the so-called wholesale CBDC used between financial institutions to settle trades in financial markets. Central banks are exploring whether CBDC could help them to achieve their public good objectives, such as safeguarding public trust in money, maintaining price stability and ensuring safe and resilient payment systems and infrastructure. If successful, CBDCs could ensure that in the digital economies the general public would retain access to the safest form of money; that could promote diversity in payment options, make cross-border payments faster and cheaper, increase financial inclusion and possibly facilitate fiscal transfers in times of economic crisis (such as recent pandemic). [1]
Many governmental jurisdictions have implemented their own unique definition for digital currency, virtual currency, crypto-currency, e-money, network money, e-cash, and other types of digital currency. Within any specific government jurisdiction, different agencies and regulators define different and often conflicting meanings for the different types of digital currency based on the specific properties of a specific currency type or sub-type. [ 2]

Introduction
During last decades, even before the recent pandemic, cash use in payments has been declining in several advanced economies; since then, commercially provided, fast and convenient digital payments have grown enormously in volume and diversity. Forced to adapt to modern digital challenges and pursue their public objectives, central banks have been actively researching the pros and cons of offering a digital currency to the public, i.e. the CBDC. Globally, approaches to CBDCs have advanced significantly in the last few years providing sufficient data concerning potential benefits and risks.
Commonly agreed global principles emphasize that: a) a central bank should not compromise monetary or financial stability by issuing a CBDC; b) a CBDC would need to coexist with and complement existing forms of money; and c) a CBDC should promote innovation, socio-economic and financial efficiency. [3]
The general EU-wide principle is that “new digital financial technologies can facilitate access to financial services and improve the efficiency of the EU financial system”. Artificial intelligence, social networks, machine learning, mobile applications, distributed ledger technology, cloud computing and big data analytics have given rise to new services and business models by established financial institutions and new market entrants. [4]
Since 2000s, when the EU has been implementing the so-called e-money directive (amended in 2009) by dealing with the “pursuit and prudential supervision of the business of electronic money institutions”. The directive was adopted in response to the emergence of new pre-paid electronic payment products and was intended to create a clear legal framework designed to strengthen the internal market while ensuring an adequate level of prudential supervision.
In the review of the directive in 2009, the Commission highlighted the need to revise some of its provisions having hindered the emergence of a true single market for electronic money services and the development of such user-friendly services. [5]
Then, the Commission initiated the analysis of the “European financial data space”, with creating an expert group in June 2021 to formulate “advice and expertise” to several EU financial bodies: e.g. the DG Financial Stability, Financial Services and Capital Markets Union (FISMA) concerning legal drafts and policy guidelines in the field of data sharing in the financial sector, to further the establishment of a EU-wide financial data space, as well as possible interaction with other data spaces and data-sharing beyond the financial sector. [6]
In June 2024, the Commission started the so-called targeted consultation on gathering input from all financial services stakeholders including companies, consumer associations and particularly financial firms which provide or deploy/use AI systems. This targeted consultation include issues needed analysis of “multiple choice and open answers” in three parts: a) general AI development, b) AI’s implications to specific usage in political economy, and c) effect of adopted European AI Act related to the financial sector services. [7]
The ECB, the EU governing financial institution has been actively working on advancing the development of the CBDC to provide banks with an effective “tool to offer improved products and services”, as well as creating a “stable foundation of digital public money”. Scientists and practitioners also acknowledge see that “CBDCs do have the potential to help defend or strengthen monetary sovereignty”. These efforts have been in line with the CBDC’s vital element as an “opportunity at any time to convert private money, provided by commercial banks, into public money or the money of the central bank 1:1, as well as to use this public money to make payments”. [8]
Stable monetary foundation for digital payments is necessary for growing demands and challenges to the European strategic autonomy and monetary independence, including the electronic payment solutions offered to outside EU third countries. However, global techno-companies are able to introduce stable crypto coins that might theoretically destabilize the current financial system and increase the risk of the payment market, noted experts in Latvia Central Bank. [9]
The European Central Bank, ECB introduced digital currency project in 2021 with the aim to move to the development stage in 2023; at the same time, widespread use of the European CBDC may be possible later. E.g. already in 2022, the ratio of non-cash and cash payments in Latvia is 71% to 29%. [10]

Digital currency issues in the EU
A virtual currency has been defined by the ECB in 2012 as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”; it has been the first EU-wide attempt to provide the basis for a further discussion on virtual currency schemes.
The Bank for International Settlements, BIS defines CBDC as “a form of digital money, denominated in the national unit of account, which is a direct liability of the central bank”. Besides, CBDC can be designed for retail use (as a general purpose) to function as a digital banknote for citizens, and/or for wholesale use to be available to eligible financial institutions only “for use in wholesale payment and settlement systems”. [11]
Virtual communities globally and in those in the EU have proliferated in recent years: a phenomenon triggered by technological developments and by the increased use of the internet. In some cases, these communities have created and circulated their own currency for exchanging the goods and services they offer, and thereby provide a medium of exchange and a unit of account for that particular virtual community.
The ECB research also noted some specific virtual currency schemes’ features to differ from electronic money schemes insofar as the currency being used as the unit of account has no physical counterpart with legal tender status. The absence of a distinct legal framework leads to other important differences as well:
= Firstly, traditional financial actors, including central banks, are not involved; the issuer of the currency and scheme owner is usually a non-financial private company: it means that typically financial sector regulation and supervision is hardly applicable.
= Secondly, the link between virtual currency and traditional currency (i.e. currency with a legal tender status) is not regulated by law, which might be problematic or costly when redeeming funding.
= Lastly, the fact that the currency is denominated differently (outside euro, US dollar, etc.) means that complete control of the virtual currency is given to its issuer, who governs the scheme and manages the supply of money at will.
The ECB mentioned two case studies on virtual currencies: the first case study related to Bitcoin, a virtual currency scheme based on a peer-to-peer network; it does not have a central authority in charge of money supply, nor a central clearing house, nor are financial institutions involved in the transactions, since users perform all these tasks themselves. Bitcoins can be spent on both virtual and real goods and services: its exchange rate with respect to other currencies is determined by supply and demand in several exchange platforms. The scheme involved some controversies, i.e. because of its potential to become an alternative currency for drug dealing and money laundering, as a factor of bitcoin’s high degree of anonymity.

The second case study in the ECB analysis was the Second Life’s virtual currency scheme, in which Linden Dollars were used; the scheme can only be used within this virtual community for the purchase of virtual goods and services. Linden Lab manages the scheme and acts as issuer and transaction processor and ensures a stable exchange rate against the US dollar. However, the Second Life scheme has been subject to debate, and it has been suggested that this currency is more than simply money for online gaming. [12]
By 2016, over 24 countries have been investing in distributed ledger technologies, DLT with $1.4bn in investments; additionally, over 90 central banks were engaged in DLT discussions, including implications of a central bank to issuing digital currency.
The Danish government proposed getting rid of the obligation for selected retailers to accept payment in cash, moving the country closer to a “cashless” economy: thus, the Danish Chamber of Commerce supported a “digital move: i.e. presently, about a third of Danes uses Mobile Pay, a smartphone application for transferring money. [13]

Crowdfunding
Another element in the EU’s efforts to get along the digital finances is crowdfunding. The EU market for crowdfunding is underdeveloped compared with other major world economies: for many years, one of the biggest hurdles faced by crowdfunding platforms seeking to offer their services across borders has been diverging licensing requirements and the lack of common rules across the EU states. It has resulted in high compliance and operational costs, which prevented crowdfunding platforms from efficiently scaling the provision of their services.
As a result, small businesses had fewer financing opportunities available to them and investors had less choice and faced more uncertainty when investing cross-border.
Crowdfunding is increasingly an established form of alternative finance for start-ups and SMEs, typically relying on small investments. Crowdfunding represents an increasingly important type of intermediation where a crowdfunding service provider, without taking on own risk, operates a digital platform open to the public in order to match or facilitate the matching of prospective investors or lenders with businesses that seek funding. Such funding could take the form of loans or the acquisition of transferable securities or of other admitted instruments for crowdfunding purposes. It is therefore appropriate to include within the scope of the EU-wide digital currency’s efforts both lending-based crowdfunding and investment-based crowdfunding, since those two types of crowdfunding can be structured as comparable funding alternatives.
The provision of crowdfunding services generally involves three types of actors: the project owner that proposes the project to be funded, investors who fund the proposed project and an intermediating organisation in the form of a crowdfunding service provider that brings together project owners and investors through an online platform.
Crowdfunding can contribute to providing access to finance for SMEs and completing the Capital Markets Union. Lack of access to finance for SMEs constitutes a problem even in those Member States where access to bank finance has remained stable throughout the financial crisis. Crowdfunding has emerged and become an established practice of funding business activities of natural and legal persons. Such funding takes place through online platforms; the business activities are typically funded by a large number of people or organisations; and the businesses, including business start-ups, raise relatively small amounts of money. [14]
The 2020/1503 regulation lays down uniform EU-wide rules for the provision of investment-based and lending-based crowdfunding services related to business financing. It allows platforms to apply for an EU passport based on a single set of rules, which makes it easier for them to offer their services across the EU with a single authorization.
The new rules are expected to increase the availability of this innovative form of finance, which will help companies seeking alternatives to bank financing. Investors on crowdfunding platforms, meanwhile, will benefit from an aligned and enhanced investor protection framework, based on: a) clear rules on information disclosures for project owners and crowdfunding platforms, b) rules on governance and risk management for crowdfunding platforms, and c) strong and harmonised supervisory powers for national authorities overseeing the functioning of crowdfunding platforms.

Conclusion
The CBDC’s perspective development in the EU requires careful consideration and engagement with a wide range of stakeholders, including private sector and legislators. To successfully meet its policy objectives, a CBDC system should allow a wide range of private and public stakeholders to participate and, in doing so; deliver services, which benefit end users. However, complex issues concerning the currency’s design, benefits and potential implementation risks still need careful and systematic consideration. The evolving payments landscape –both globally and nationally – requires the central banks to provide for some serious assessments concerning the CBDC’s use for retail/wholesale and cross-border needs. [15]
The BIS recent survey reveals that 94 percent of central banks are actively exploring CBDCs, with each institution progressing at its own pace and considering various design features. Thus, in 2023, there has been a significant increase in experiments and pilots related to wholesale CBDCs, particularly in advanced economies, though emerging markets and developing economies have also ramped up their efforts. The likelihood of central banks issuing a wholesale CBDC in the next six years now surpasses that of issuing retail CBDCs.
However, in May 2014, the US Securities and Exchange Commission, SEC “warned about the hazards of bitcoin and other virtual currencies”.
Bottom line: a preliminary conclusion acknowledges that existing crypto-currencies, like bitcoin, are too volatile to possess the essential attributes of money. For example, stable-coins have fragile currency pegs that diminish their utility in transactions: the CBDCs could be a solution in resolving the incurred problems.

Notes and references
1. Reference to BIS Innovation Hub at: https://www.bis.org/about/bisih/topics/cbdc.htm
2. Main source: https://en.wikipedia.org/wiki/Digital_currency
3. Source: Bank of International Settlements’ paper “Central bank digital currencies: foundational principles and core features” in: https://www.bis.org/publ/othp33.pdf
More on the European “digital decade” in: https://www.integrin.dk/2024/07/05/european-digital-decade-strengthening-the-eu-wide-digital-transformation/
4. Source: https://finance.ec.europa.eu/digital-finance/overview-digital-finance_en
5. Sources: a) Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000; b) Directive 2009/110/ of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC.
The text in: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32009L0110
6. More in the report: https://finance.ec.europa.eu/document/download/226bcd0a-fff7-4fbd-9664-a84f50122101_en?filename=2022-10-24-report-on-open-finance_en.pdf
7. More in: https://finance.ec.europa.eu/regulation-and-supervision/consultations-0/targeted-consultation-artificial-intelligence-financial-sector_en
8. Source: Chia C., Helleiner E. Central bank digital currencies and the future of monetary sovereignty. – Finance and Space, 2024, vol. 1, Issue 1, pp. 35-48. DOI:10.1080/2833115X.2023.2273544.
9. Source: https://www.bank.lv/en/component/content/article/682-news-and-events/publications/articles/13083-digital-euro-how-much-have-we-achieved
More in: Vecbaštiks R., Dārziņš E. Digital euro – how much have we achieved? – Latvian Bank website at: https://www.bank.lv/en/component/content/article/682-news-and-events/publications/articles/13083-digital-euro-how-much-have-we-achieved
10. Source: The Baltic Times, 2022. At: https://www.baltictimes.com/_payment_radar___the_ratio_of_non-cash_and_cash_payments_is_71__to_29__in_latvia/
11. Source and citation from: https://www.bis.org/publ/othp33.htm and https://www.bis.org/publ/othp33.pdf.
12. Source and citation from ECB-Vertical currency scheme prepared in 2012: https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
13. Source: Matthews, Chris “Cashless society: Denmark to allow shops to ban paper money”. – Fortune Magazine. 22 May 2015.
14. Source: Regulation 2020/1503 on European Crowdfunding Service Providers, ECSP for businesses; in effect from January 2022. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32020R1503
15. Reference to: https://www.regulationtomorrow.com/eu/bis-paper-on-central-bank-digital-currencies-ongoing-policy-perspectives/

Note. The article used some inspiration and resources from: Baltgailis J., Meņšikovs V., Šipilova V. (2024) Reasons and macroeconomic aspects of the introduction of the digital currency of central banks. – Sociālo Zinātņu Vēstnesis/Social Sciences Bulletin, 38(1): 7-18. https://doi.org/10.9770/szv.2024.1(1)

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