European Parliament resolution on distributed ledger technologies and blockchain

On 3 October 2018, the European Parliament (EP) issued a resolution acknowledging distributed ledger technologies (DLT) and blockchain, it also outlined the sectors in which these may be of use together with the inherent risks[1].  

Following on from its resolutions of 26 May 2016 on virtual currencies[2], and 28 April 2017 on ‘FinTech: the influence of technology on the future of the financial sector[3]’, the EP highlights the benefits of DLT and blockchain as a means of empowering citizens by giving them autonomous control of their own data; improved trust and transparency which provides a systematic route for the improvement of key sectors of economy. The EP provides important guidance, through its resolution, to the competent regulators in Member States by stipulating that their approach toward DLT should be innovation-friendly, with a framework that provides legal certainty, enables passporting and respects the principles of technology neutrality and business-model neutrality, while at the same time promoting investor and consumer protection. The EP seeks to ensure reduction of intermediation costs in a transparent environment, while allowing peer-to-peer exchange of value.

Financial sector

The establishment of use of DLT in the financial sector can significantly reduce transaction costs and hidden costs in light of financial disintermediation; through cryptographic algorithms that replace third party intermediaries by using a mechanism that performs the validation, safeguarding and preservation of transactions. Further exploration as to the capabilities of DLT by major financial institutions is encouraged by the EP, who similarly encourages the financial authorities to observe developing trends in the financial sector.

The EP calls for further examination of alternative methods of payment and transfer of value such as cryptocurrencies and emphasises the volatility and overall unpredictability surrounding cryptocurrencies, while encouraging the European Central Bank (ECB) to provide feedback on the sources of such volatility. The EP seeks to examine in further detail the possibilities of incorporation of cryptocurrencies in the European payment system and the dangers that such incorporation may present to the public.

SMEs, technology transfer and financing

The aim is to introduce a harmonised alternative investment instrument which funds small and medium-sized enterprises (SMEs) and innovative start-ups potentially with the use of Initial Coin Offerings (ICO) which is regarded as an essential element within the capital markets union.

The EP calls for further guidelines, standards and disclosure requirements with a view to reducing the risks of fraudulent or illegal activities derived from the lack of consistency in the available information, the ultimate goal being consumer and investor protection.

The EP, more specifically, calls for the creation of an observatory for the monitoring of ICOs and a database of their characteristics and taxonomy which makes the distinction between security and utility tokens. At the same time, they suggest the implementation of a model regulatory sandbox framework and a code of conduct setting harmonised standards but also underlines its proposal not to regulate DLT per se and to remove existing barriers to implementing blockchain.

National authorities are urged to swiftly build up technical expertise and regulatory capacity enabling rapid legislative or regulatory action if and when necessary.

The need for innovative SMEs and start-ups to gain access to funding in order to develop DLT-based projects is further observed. The EP openly invites the ECB and European Investment Fund (EIF) to create funding opportunities to support such endeavours.

Smart contracts

The EP sets out the importance of facilitating the use of smart contracts, which are in element enabled by the DLT and which can act as key enablers of decentralised applications and disintermediation, and stresses the need for an in-depth evaluation of relevant legal implications, such as jurisdictional considerations, as well as an analysis of the existing legal framework in each Member State in respect of the enforceability of such contracts. The EP also underlines the importance of legal certainty as to the validity of a digital cryptographic signature which would be critical in furthering and facilitating the use of smart contracts.

Utilisation of DLT in other sectors

The EP is keen to support the use of DLT across different sectors, including the production and consumption of green energy and in particular, improving the efficiency of energy exchanges through DLT between households on a peer-to-peer basis, democratising the energy market and creating alternatives to state-sponsored renewable investment schemes.

The potential of DLT in improving mobility and logistics for the transport industry, including the administration, registration and verification of vehicles, distances and smart insurance, is also underscored by the EP.

The potential of DLT in the healthcare sector is further examined in terms of improving data efficiency, the exchange of such data across public and private sectors, and allowing EU citizens to control their own health data.

The EP takes the view that DLT can also be used as a tool to improve and monitor supply chains, in terms of protocols; transparency and visibility, as to source and origin of goods; ingredients and components; compliance; and overall consumer protection.

In terms of ‘digitalised’ creative content, the EP emphasises the capability of the use of DLT to monitor, track and manage intellectual property and facilitate copyright and patent protection.

General considerations

The EP underscores that the establishment of a DLT ecosystem will inevitably involve self-sovereignty and trust among users who will be able to control what personal data they want to share.

DLT uses must be compliant with the EU legislation on data protection and importantly, the General Data Protection Regulation (GDPR).  

The resolution sets out proposed policies with a view to implementing DLT technologies across various sectors in Europe, in line with the EP’s recent Fintech Action Plan; and highlights the opportunity for the EU to become a global leader in the DLT field.

For more information on this matter, please reach out to your usual Harneys contact or the article’s authors.

 

[1] Text (provisional) adopted P8,_TA-PROV(2018)0373

[2] Texts adopted, P8_TA(2016)0228

[3] Texts adopted, P8_TA(2017)0211