Welcome to the second edition of our Law Digest, where we dissect the intricacies of asset tokenization regulations.
Throughout this series, we aim to navigate the complexities of transformative legislation, shedding light on its impact on the tokenization of assets and exploring the implications for investors, financial entities, and the broader market. Join us as we uncover the nuances of this evolving regulatory framework and unravel its implications in the ever-evolving world of asset tokenization.
In this edition we cover: The policy debates surrounding the Digital Euro have ignited a crucial discourse in European financial circles. Recent discussions, from the European Parliament’s deliberations on design options to concerns raised about its impact on banking and market dynamics, reflect a landscape teeming with uncertainties and diverse opinions. The European Central Bank’s Financial Stability Review underscores persistent vulnerabilities, lending urgency to the potential of a Digital Euro in bolstering financial resilience. Concurrently, initiatives like the Eurosystem’s call for trials and the EBA’s consultation on anti-money laundering measures underscore the multifaceted considerations shaping the Digital Euro’s future.
The public hearing on the 28th of November by the European Parliament Econ Committee showed that policy experts are grappling with uncertainties surrounding the operational framework and market implications of the digital euro. They discussed various design options proposed by the Commission and how issuing a digital euro could affect the banking system. Members of the European Parliament (MEPs) raised concerns about the European Central Bank’s (ECB) dual role as a market supervisor and participant, highlighting worries about potential monopolies and competition issues. Some MEPs supported imposing holding limits on the digital euro, wary of the impact on banks, while others argued for a gradual increase akin to the Bank of England’s strategy.
Regarding fees, there were worries about disproportionate charges in the current payment market and potential merchant exploitation in the digital euro ecosystem. Privacy concerns were voiced, emphasizing the need to combat money laundering while safeguarding consumer privacy. There were differing opinions on whether the digital euro would replace cash entirely, with discussions on its practicality in various contexts.
Opinions diverged on the broader impact: some saw it as bolstering European autonomy, while others cited examples like China to caution against the success of Central Bank Digital Currencies (CBDCs).
The ECB’s Financial Stability Review, released on November 22, flags ongoing vulnerabilities in euro area markets due to macro-financial shifts and geopolitical risks. The outlook remains precarious, with potential for a recession, as tighter financial conditions may impact the real economy. The ECB identifies key concerns: non-banks facing higher debt service costs, vulnerabilities in the real economy, and risks from leverage and low liquidity in the non-bank financial institution (NBFI) sector. The ECB recommends bolstering NBFI resilience and aligning European Money Market Funds (MMFs) with global standards.
While euro area insurers are resilient overall, they’ll grapple with long-term challenges posed by climate change. Banks confront escalating risks tied to asset quality, which may restrict profits due to increased living costs, altered lending dynamics, and limited transmission of interest rate hikes to depositors. Basel III reforms and completing the Banking Union are stressed as essential. Moreover, the ECB sees potential financial stability advantages in introducing the digital euro, offering an alternative to private digital currencies and fostering innovation, potentially benefiting both banks and nonbank entities.
The Eurosystem is seeking participation from financial market stakeholders for trials and experiments exploring new technologies in settling wholesale central bank money. They’re inviting stakeholders to express interest in trials between May and November 2024, with two deadlines for response—January 31, 2024, for the earlier period and April 30, 2024, for the latter. The call includes details on timelines, use cases, and requirements for participation, along with registration information.
Previously, in April 2023, the Eurosystem announced plans to explore solutions for settling financial transactions on distributed ledger technology platforms using central bank money. They conducted a survey on these plans and will present insights and details on the trials, experiments, and three potential solutions at a focus session on December 15, 2023.
The EBA has initiated a consultation concerning the formulation of new guidelines targeting the prevention of money laundering and terrorist financing activities associated with both fund and crypto-asset transfers. These guidelines, commonly referred to as ‘travel rule’ guidelines, delineate specific measures expected from Payment Service Providers (PSPs), Intermediary PSPs (IPSPs), crypto-asset service providers (CASPs), and Intermediary CASPs (ICASPs). They aim to identify instances where transfers lack complete or requisite information, outlining protocols to manage such deficient transfers. Additionally, these guidelines facilitate the traceability of such transfers, enabling relevant authorities to undertake necessary measures to prevent, detect, or investigate potential money laundering and terrorist financing activities.
