Digitalisation of Financial Services – The Present and Future of Modern Financial Markets

The digital transformation of the financial sector is a core project of the European Union and has been actively driven forward through the 2020 Digital Finance Strategy. The aim is to harness the benefits of digital innovation, reduce market fragmentation, create a level playing field and better manage technological risks. Market participants must adapt to changing rules, while also having the opportunity to help shape them. Examples include:

Digital Single Market for Financial Services

A key objective of the EU is the gradual completion of the internal market across all 27 Member States. In the digital single market for financial services, the so-called European passport – well known as a core element of the freedoms of services and establishment – has also been extended to providers of digital financial services. The ECSP Regulation (European Crowdfunding Service Providers) and MiCAR (Markets in Crypto-Assets Regulation) already contain the conditions for cross-border activity. Further proposals, such as the regulation of non-bank lending, are in preparation.

Another important component is the revision of the eIDAS Regulation to introduce an EU-wide digital identity. This reform is essential for customer due diligence (CDD) obligations and is intended to establish standardised identification procedures throughout the EU.

The European Commission also promotes dialogue between technology providers, supervisory authorities and market participants through the EU FinTech Lab – a forum designed to identify and address regulatory obstacles early and to help shape future regulatory frameworks.

Common Financial Data Space

Another forward-looking initiative is the creation of a Common Financial Data Space as part of the EU’s broader data strategy. This is intended to facilitate data-driven innovation and enhance the connectivity of market participants. The Data Governance Act and the Data Act will form the legislative basis. A secure, interoperable and fair framework for accessing financial data – based on standardised interfaces and formats – will improve data portability and usability for both institutional actors and consumers. Here too, established regulatory concepts – for example, the provision of financial market data under MiFIR – are being translated into the digital environment.

Crypto-Assets and the Markets in Crypto-Assets Regulation (MiCAR)

MiCAR is the world’s first comprehensive regulatory framework for the crypto-asset market. It covers, in particular, issuers and service providers of crypto-asset services. A broad territorial scope is combined with the European passport, which facilitates cross-border activity within the internal market. By contrast, market access for third-country providers is considerably more difficult: they are subject to stringent requirements and cannot rely on equivalence mechanisms, which the European legislator deliberately excluded. The goal is to ensure a level playing field and prevent regulatory arbitrage.

Pilot Regime for DLT-Based Market Infrastructures

The Pilot Regime for market infrastructures based on Distributed Ledger Technology (DLT) allows certain financial market infrastructures – such as multilateral trading facilities (MTFs) and central securities depositories – to operate on a DLT basis. It provides a real-market test environment for regulatory experimentation with this emerging technology. The regime introduces exemptions from existing rules to promote innovation while safeguarding market integrity.

Digital Operational Resilience in the Financial Sector (DORA)

With the Digital Operational Resilience Act (DORA), the EU aims to ensure that financial institutions have robust IT systems that function reliably even under stress. DORA imposes extensive ICT risk management obligations, including reporting obligations for major IT incidents and enhanced oversight of third-party providers of critical ICT services. Its objective is to institutionalise cyber resilience and establish consistent supervision of digital operational risks, linked to the established structures of financial supervision.

Digital Payments

Digital payments in the EU are undergoing a comprehensive transformation. The Regulation on Instant Payments requires payment service providers to process SEPA credit transfers within seconds. Another major initiative is the new Payment Services Regulation and Directive (PSR and PSD III), which will reform the framework for payment services and classify e-money as a regulated payment service. In parallel, the European Central Bank is advancing work on a digital euro, which – based on DLT – will provide a form of digital central bank money in a secure and interoperable environment.

Outlook

The initiatives shaping the legal framework for digital financial services are diverse. Well-established concepts designed to safeguard fundamental freedoms in the internal market are being combined with new approaches. This makes in-depth knowledge of market developments and technology indispensable. All market participants must continuously monitor legal and technological developments and integrate them into their strategies – this applies equally to legal advisers, for whom digital competence has become an essential part of high-quality advice.