Governing the Digital Finance Value-Chain in the EU: MIFID II, the Digital Package, and the Large Gaps between!

Abstract

The emergence of the complete digitization of the financial services value chain has gathered pace due to the advent of the Covid-19 pandemic. It is mainly premised on automation of the investment process through the use of algorithmic tools and remote delivery of services via integrated platforms and apps. During the same period, we have witnessed the emergence of decentralised finance, cryptocurrencies aside, and the increased use of blockchain technology. Together these developments promise radical changes in market structure and microstructure. The digitization of the finance value chain could cause respectively more market concentration or conversely radical democratisation of investment markets. For this reason, the choices of policy-makers will be of cardinal importance. At the same time, digitisation is the best opportunity so far to create a fully integrated EU market for new listings and secondary trading in securities, and to further SME access to finance, thus making reality the vision of an EU Capital Markets Union. While these developments raise critical challenges for EU policy-makers in the post-Brexit era, the regulatory landscape in the EU is still dominated by the older MIFID II approach to market regulation. Reform attempts seem over-cautious and unwilling to unleash the powerful forces of technology and innovation to avoid upsetting settled industry practices (and incumbent oligopolies). EU Regulation has to become more proactive fostering regulatory experimentation in tandem with technological one to make sure that consumers interests are safeguarded, competition is furthered, and essential finance infrastructure is not dominated by a tight rent-seeking oligopoly. Therefore, the EU Digital Finance package in its present form is a welcome yet timid step forward. A number of further reforms are required to accelerate the pace of regulatory adaptation to the challenges and opportunities of the new digital era for European markets strengthening post-Covid 19 economic recovery.

Keywords: Fintech, blockchain, decentralized finance, MiFID, Digital Package

JEL Classification: K22