The European Parliament's Committee on Economic and Monetary Affairs has presented a European Added Value Assessment (EAVA) to showcase the benefits and impacts of asset digitisation on the continent's economy.
The European Parliament published a report where he talks about the importance of the digitalization of assets within the European economy, as a fundamental aspect in the positive development of financial services provided on this continent. Titled “Digital finance: Emerging risks in crypto-assets – Regulatory and supervisory challenges in the area of financial services, institutions and markets”, the report addresses emerging risks in digital financial services, as well as the current challenges for the creation and application of appropriate regulations and the need for supervision and oversight within the sector, especially at financial services institutions and the different existing markets.
Through the European Added Value Assessment (EAVA), Parliament seeks to identify the gaps that exist within the current legislation of the European Union, and the way in which these gaps can be filled in order to implement regulations that foster digital financial innovation in the new technological era.
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Development of digital finance in Europe
According to the report, digital finance is gaining in importance within the current European financial system, as digitalisation advances and new technologies develop in leaps and bounds.
“Rapid progress in digitalisation, data analytics and computing capabilities are enabling a new range of financial services and transactions, helping to drive innovation.”
Digital financial services are attracting everyone's attention, especially in the difficult times we are currently experiencing due to the COVID-19 pandemic, which requires citizens to isolate themselves to comply with health regulations and avoid possible infections. However, there are still many risks associated with these services, which is why Parliament believes that the application of appropriate regulations can help mitigate these risks and develop the full potential offered by digitalisation.
The European Parliament's vision
The current uncertainty and constant changes associated with digital assets and digital finance are causing a number of regulatory challenges on the continent and around the world. Firstly, the European Parliament points out that crypto assets have a particular characteristic: They have an international and cross-border dimension. Due to their nature, digital assets can cause “exacerbated concerns” if they are not backed by a responsible entity or regulation that guarantees their transparent use and management, especially for investors who may be unprotected against inappropriate practices that put their funds at risk.
Likewise, the organization points out that, due to the rapid advancement and development of technology, digital assets must be subject to constant evaluation, which allows for the updating and adaptation of regulations as they evolve. Similarly, the organization sees the need for a clear and concrete definition of the terms “crypto asset”, “cryptocurrency” or “digital asset”, since to date there are no clear definitions in Europe that specify exactly the meaning of these terms and all their implications.
“So far, there is no comprehensive and commonly accepted taxonomy of cryptocurrencies. As a result, there are still a large number of definitions as to what exactly the term “crypto-assets” encompasses.”
Based on these points, the European Parliament considers that a clear assessment of all types of digital assets that exist will allow for the establishment of classifications for the definition and application of a regulatory framework for cryptocurrencies and digital assets. This regulatory framework will allow for the legal protection of investors and the successful development of digital finance in Europe. Likewise, the organization considers it essential to establish cybersecurity systems that guarantee data protection, together with a global data strategy.
Benefits of asset digitization
The European Parliament notes that the expansion of digital financial markets leads to positive development of the European economy in general, as the availability of qualified employment would increase exponentially, as would the investment and innovation capacity of companies and financial organisations.
«The digitalisation of assets could also benefit the economy at large. The overall expansion of the cryptoasset market, which as mentioned above would go hand in hand with digital financial innovation, could significantly increase skilled employment, innovation and investment.»
On the other hand, the European Parliament points out that cryptocurrencies such as Bitcoin “are just the tip of the iceberg” of a new financial model that offers a multitude of advantages and benefits. Although Bitcoin is one of the assets that has attracted the most attention from the public, other innovations, such as CBDC will allow us to take better advantage of all the possibilities offered by digitalization, especially in the banking sector. In this regard, the European Central Bank It also believes that the digitalisation of financial systems and services will bring major positive impacts to the economy, particularly in terms of increased efficiency, reduced operating costs and broader reach and diversification of assets.
Cryptocurrency market capitalization
Likewise, although the figures shown by the data provider Nomics They reflect that crypto assets have not been massively adopted for financial transactions, although the consolidation of initiatives, proposals and projects that are accelerating the adoption of digital assets in current financial markets is notable.
“The market capitalization of crypto assets remains small relative to the global financial system, at approximately €230.000 billion as of July 1, 2020, 0,9% of the market capitalization of the S&P Index 500 and 2,8% of the global value of gold.”
At the time of writing, the market capitalization of cryptocurrencies was around €230 billion. As of the date of this publication, the market capitalization of crypto assets exceeds €296 billion, according to the same data provider.
This increase reflects the growth that cryptocurrency trading and exchange platforms are currently experiencing. In turn, the introduction of new products and services, such as cryptocurrency-listed products, digital securities lending, the creation of cryptocurrency banking entities such as Kraken Financial and more, drive the adoption of crypto assets.
In short, with the presentation of this research, the European Parliament seeks to encourage the study of the potential benefits that the adoption of crypto assets brings for the development of the European economy, as well as how to minimize the risks associated with this adoption through appropriate regulations.
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