Contribution to the Workshop of the European Centre for Alternative Finance (ECAF) and European Commission (EC)

1. Regulatory challenges
for Fintech across the EU
European Centre for Alternative Finance (ECAF)
and European Commission
May 24, 2019
Simon Lelieveldt
lelieveldt@simonl.org - Linkedin - Twitter

2. Two main topics
1. Definitions and level playing field
• define the playing field for the market
• determine subject of regulation
Fintech requires regulators to be precise, functional and tech-savy
2. Innovation vs overregulation – FATF-example ‘virtual assets’
• Balancing interest and perspectives (economic growth – integrity – privacy)
• Ensuring proper impact assessment, stakeholder involvement and legitimate
decision making

3. 1. Definitions and
level playing field

10. PREPAYMENT OF GOODS
AND SERVICES
ELECTRONIC MONEY LIMITED NETWORK
(out of scope PSD2-EMD)
Since PSD2 - notification -
obligation

11. PREPAYMENT OF GOODS
AND SERVICES
ELECTRONIC MONEY LIMITED NETWORK
(out of scope PSD2-EMD)
Since PSD2 - notification -
obligation

12. Previous dynamics in market and regulation
1980 1989 1993 - 1995

13. Friction of definitions and technologies
Technology Regulation Friction area
Electronic cash – e-
money
E-money Directive E-money on mobile
phones (PSD2 – 3l)
Internet Payment Cash
registers, purchase
cards – fuel cards
Payment Services
Directive
Limited network
(PSD2-3k)
Alternative FInance Definitions banking,
SFD, Payments
Regulatory status of
crowdfunding
Bitoin - blockchain Payment Services
Directive
What are virtual
currencies / assets ?

14. Bitcoin Blockchain
DLT
ICO ITO
Payment
Ledger
Asset
Commodity
Securities
Technical
narrative
Regulatory
narrative
Crowdfunding Art. Intell.

15. Definitions: relevant research
• Comparing definitions in regulation
• Comparing supervisory approaches
• Designing alternate regulatory approaches
Example new approach PSD3:
• Apply basic customer protection rules to all products and
services that look like payments
• Apply prudential rules to all service-providers that actually
offer payment services

16. 2. Innovation and
overregulation –
FATF – virtual assets

17. Where are we now on regulation?
• Crypto and blockchain regulation is a function of:
• Previous experiences with e-money (Japan)
• Degree of business activity
• ‘Flavour and quality of country regulation of (economic) life
• Moving from payments to ledgers, assets and markets; with the
challenge to maintain the functional perspective
• International consensus on integrity and monitoring but not even the
beginning of a harmonized definition

18. Regulation in Europe
• Basic position: it’s not money (ECB 2012), but insulate crypto (EBA, 2014)
• Common ground: transpose AML 5 - directive and get exchanges and
wallets to identify and check users and transactions
• Country specific choices varying from restrictive to a race to become the
Crypto-hotspot / regulatory facilitator
• Gibraltar, Switzerland, Malta, UK….
• Patchwork, leading to EU approach eventually (power of the centre)
• EBA and ESMA Report: FISMA – definition discussion is required
• ECB Crypto working group (June 2019(: there is no worldwide definition

19. Definitions ECB
1. “A virtual currency is 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”. 2012
Then:
2. Virtual currency is “a digital representation of value, not issued by a
central bank, credit institution or e-money institution, which, in some
circumstances, can be used as an alternative to money.“ 2015
Now:
3. “crypto-asset” denotes any asset recorded in digital form that is not and
does not represent either a financial claim on, or a financial liability of, any
natural or legal person, and which does not embody a proprietary right
against an entity 2019

20. Where are we now on regulation?
• Crypto and blockchain regulation is a function of:
• Previous experiences with e-money (Japan)
• Degree of business activity
• ‘Flavour and quality of country regulation of (economic) life
• Moving from payments to ledgers, assets and markets; with the
challenge to maintain the functional perspective
• International consensus on integrity and monitoring but not much
more
We acknowledge that technological innovation, including that underlying crypto-assets, has the
potential to improve the efficiency and inclusiveness of the financial system and the economy more
broadly. Crypto-assets do, however, raise issues with respect to consumer and investor protection,
market integrity, tax evasion, money laundering and terrorist financing. Crypto-assets lack the key
attributes of sovereign currencies.
At some point they could have financial stability implications. We commit to implement the FATF
standards as they apply to crypto-assets, look forward to the FATF review of those standards, and call
on the FATF to advance global implementation. We call on international standard-setting bodies (SSBs)
to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess
multilateral responses as needed.
G20-statement Buenos Aires, 2018

21. Issue FATF – definitions…. inconsistent
• Introduce new definition of virtual asset (October 2018) as:
• Finalize guidelines and new recommendation by June 19-20, 2019
A virtual asset is a digital representation of value that can be digitally traded, or
transferred, and can be used for payment or investment purposes. Virtual assets do not
include digital representations of fiat currencies, securities
1. For the purposes of applying the FATF Recommendations, countries should consider
virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other
“corresponding value”. Countries should apply the relevant measures under the FATF
Recommendations to virtual assets and virtual asset service providers (VASPs).

22. Divergence ECB and FATF definition
ECB – 2019: “crypto-asset” denotes any asset recorded in digital form that is not
and does not represent either a financial claim on, or a financial liability of, any
natural or legal person, and which does not embody a proprietary right against an
entity.
1. For the purposes of applying the FATF Recommendations, countries
should consider virtual assets as “property,” “proceeds,” “funds”, “funds or
other assets,” or other “corresponding value”. Countries should apply the
relevant measures under the FATF Recommendations to virtual assets and
virtual asset service providers (VASPs).

23. Issue FATF – export all customer data by
default – article 7b in recommendation 15
• (b) R.16 – Countries should ensure that originating VASPs obtain and
hold required and accurate originator information and required
beneficiary information2 on virtual asset transfers, submit the above
information to beneficiary VASPs and counterparts (if any), and
make it available on request to appropriate authorities.
• It is not necessary for this information to be attached directly to
virtual asset transfers. Countries should ensure that beneficiary VASPs
obtain and hold required originator information and required and
accurate beneficiary information on virtual asset transfers, and make
it available on request to appropriate authorities.

24. What happened with this issue
• Informal consultation on individual levels of Ministries of Finance with
market – a lot of pushback
• Consultation by FATF between february – april 2019
• Results of consultation kept secret
• Private Sector Outreach Session of FATF in Vienna – early May
• Europol states that recommendation does not add any value
• Result: nothing – no changes despite broadly shared comments on
definitions and impossibility to implement
• Communicated to Dutch market by 15 May via e-mail.
• Articles in technical newsletters – bitcoinmagazine/coindesk

25. Current developments in NL
• Privacy First and virtual currency actors (VBNL) alarmed about the
wider implication of the FATF proposal and the fact that the Private
Sector input has not been taken into account at all
• Media attention on technical sites and with consumer focused tv-
show Radar (article on website and newsletter),
• Public call to Ministry of Finance (May 23, 2019) to revoke its support
for the proposal and to ensure that
• proper impact assessment occurs
• Dutch parliament properly discussed impact
• A proper international discussion is held

26. Follow up….
• Contacts Dutch and EU MP’s to further the discussion on legitimacy of
mass data exports vs right to privacy
• Broaden support from other blockchain based entities in the
Netherlands
• Discussion will occur at Blockchain Innovation Conference (June 7,
2019)
• Further dissemination towards EC – DG Just – DG GROW – DG
Connect ……
• Goal – take finalisation of recommendation off the FATF-table in June
20 and execute a proper impact assessment

27. Innovation or overregulation
• Interest in innovation and economic growth
• Interest to fight crime
• Interest to protect human rights and privacy
• How to balance the interests on diferent national and international
levels?
• How to ensure due process in order to maintain legitimacy of EU
institutions and rule-making

28. Details in blogs:
• FATF and EU need to fundamentally rethink their approach to virtual
assets/currencies...
• Response to FCA consultation: please clarify what will happen to the
payment in 'payment instrument' in article 3k?
• Ceci n'est pas une 'payment instrument': a reflection on fuel cards
and the PSD2 – limited network
• ECBs renewed virtual currencies report: implications for the Third
Payment Services Directive
• The ECB-report on virtual currency schemes: some reflections
• Rationality and irrationality in EU Payments legislation