Digital Finance in the EU: drivers, risks, opportunities

Digital finance can be defined as the impact of new technologies on the financial services industry.[1] New technologies have been deeply changing the banking, insurance and finance sectors. Consequently, among other things, digital finance is also driving supervisory authorities into a new age. These changes are happening at a rapid pace and require all parties involved to be well prepared.

What is driving these changes, and what are the wider implications of digital finance for supervision?

Based on the training activities in the first academic year of the EU Supervisory Digital Finance Academy (EU-SDFA), both at the European University Institute (EUI) and in workshops hosted by the European Supervisory Authorities (ESAs), the recently published e-book ‘Digital Finance in the EU: drivers, risks, opportunities’ gives a tailored overview of recent initiatives and events at the European and global levels. Moreover, it provides specific analyses of the main drivers and technologies, and the risks and opportunities in the field of digital finance.

Two opening chapters of the e-book give a general overview of the subject matter.

A chapter by Alice Guedel and Giuseppe Sciascia provides a description of some of the main initiatives taken at the European Union level in the field of digital finance. The authors consider the objectives and results to date of these initiatives, and their legacy for the future. The chapter starts with the Digital Finance Strategy adopted by the European Commission in September 2020 as part of the Digital Finance Package, which illustrates the general routes on how Europe can support the digital transformation of finance in the coming years, while regulating its risks. Following the Strategy, legislative proposals on markets in crypto-assets (MiCA) and digital resilience (DORA) were also adopted, as well as non-legislative initiatives such as the Digital Finance Platform and a revised strategy for retail payments.

Alice Guedel and Giuseppe Sciascia proceed by considering some more recent initiatives by the European Commission. These initiatives were all taken in June 2023 and they consisted in proposed amendments to modernise the Payment Services Directive and a proposal for a Payment Services Regulation, a legislative proposal for a framework for Financial Data Access (FIDA) and a ‘Single Currency Package’ to support the use of cash and propose a framework for a digital euro against the background of the investigation carried out by the European Central Bank into the possibility of introducing a form of central bank digital currency (CBDC).

Following the chapter outlined above, Ignazio Angeloni explores the challenges and perspectives of digital finance from a broader (i.e. global) viewpoint. His contribution starts by going back to the origins of digital finance and explaining how the concept is less new than it might appear. He recalls that the first systematic use of electronic messaging to transmit payment instructions dates back to around 1918 in the United States. Shortly after WWII, the first computerised system to manage personal cheques was introduced. Then cables were laid at the bottom of oceans making digital finance global. In the 1970s trading platforms gradually became computerised. Afterwards, computers invaded homes and offices, and from the mid-1990s they were all connected with one another through the internet. At the turn of the century, about 90% of the retail deposits at commercial banks plus bank reserves were in digital form, and nearly all the global financial system was negotiating, trading and settling digitally.

The evolutionary path described above did not capture much of the interest of regulators until the Great Financial Crisis. That crisis finally drew attention to the impact of digitalisation on financial structures and stability. In this respect, the author argues that digitalisation does not change finance in a fundamental way and the financial crisis of 2008-2009 did not arise because of digitalisation, although it made it more global and impactful. Against this background, the chapter evokes the different purposes served by different financial compartments, each one having specific digital applications. This framework can be used to discuss some of the most important manifestations of digital finance: cryptocurrencies; stablecoins; crypto-platforms; online payment platforms and smartphone applications; and CBDCs. In doing so, consideration is given to their potential contributions to a more diversified, effective and efficient financial sector, possible risks and how to deal with them.

In addition to the two chapters outlined above, the e-book includes a collection of valuable writings by experts and scholars with assorted backgrounds (e.g. economic, legal, institutional) who consider various topics in the field of digital finance, which are investigated from quite diverse perspectives (e.g. academic, regulatory, supervisory). The contributions included in the e-book are intentionally quite contained in length and easy-to-read; the e-book is indeed intended to represent a useful resource for both the EU-SDFA’s participants looking to enhance their learning experience and anyone interested in the intersection of digital finance and supervision.

[1] See https://finance.ec.europa.eu/digital-finance/overview-digital-finance_en

This blogpost has been produced in the framework of the EU Supervisory Digital Finance Academy (EU-SDFA).

The EU Supervisory Digital Finance Academy (EU-SDFA) is a TSI flagship initiative aimed at supporting financial supervisory authorities in coping with the risks and opportunities associated to the use of advanced technologies in the financial sector. The European Commission – DG Reform has established the Academy in cooperation with the three European Supervisory Authorities (EBA – ESMA – EIOPA) and the Florence School of Banking and Finance part of the Robert Schuman Centre of the European University Institute (FBF-EUI).