Analysis of the EU Digital Finance package – A New Finance Watch Report

18 October 2021


Finance Watch provides in a new report analysis of policy proposals by the European Commission to regulate and supervise the fast-emerging market of digital finance. This report welcomes the Commission’s initiative and explores the proposed regulations, including on markets in crypto-assets (MiCA), digital operational resilience (DORA) and market infrastructures based on Distributed Ledger Technology (DLT Pilot).

The Finance Watch analysis comes just as the International Monetary Fund recently signaled a clear need for regulators to pay attention to areas like decentralised finance. It found the size of the market swelled from $15 billion at year-end 2020 to about $110 billion as of October 2021.

The digitalisation of financial services holds great promise. It offers an opportunity to make quick and cost-effective payments, enable innovative financial services and foster access to previously “unbanked” areas. But challenges and risks remain, including disclosure and oversight.

There are risks posed by the crypto universe, and there is a need for policy options to navigate these unchartered waters. To harness the potential of digital finance in a way both safe and beneficial for European citizens, one must build upon robust regulation.

The European Commission’s digital finance package, which includes a digital finance strategy and legislative proposals on crypto-assets and digital resilience, is an important first step. But it tends to apply bespoke, “light touch” regulation instead of making use of existing frameworks, which increases fragmentation and encourages regulatory arbitrage.

Key takeaways from the report: 


In recent years, the market for crypto-assets has seen substantial inflows of capital. Retail investors have often been exposed to extreme volatility, rampant malpractice and fraud. In this context, MiCA provides a much-needed regulatory framework.

By their economic substance, many – if not most – “asset-referenced tokens” are financial instruments: They should be regulated accordingly. So-called “stablecoins” pose additional risks to users and to financial stability. If marketed to users as a means of payment, they ought to comply, at least, with the same rules as any other ‘e-money’ instruments under EMD 2.

Similarly, providers of services related to crypto-assets should be subject to the same obligations, as a baseline. This is particularly important when it comes to governance and investor protection, which apply to traditional products, for example, under the Markets in Financial Instruments (MiFID II) Directive.


Financial institutions are more and more vulnerable and exposed to cybersecurity risks. DORA recognises the need to incorporate these risks into the supervisory parameter. It does, however, impose demanding new responsibilities on supervisory authorities that are likely to put additional strain on their resources. Information and communication technology (ICT) risks are present across all sectors of the economy. Effective regulation and supervision has to be coordinated, as well as integrated as far as possible.

On DLT Pilot

The adoption of Distributed Ledger Technology, in the financial sector and elsewhere, offers huge potential. However, the creation of this “regulatory sandbox” must not set a precedent for lowering existing standards of market conduct and investor protection.

Under the DLT Pilot, retail investors should not be granted direct access to trading venues, as long as they do not enjoy the level of investor protection that is available under MiFID II.