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Review of EU payments law needed in light of virtual currencies, says Parliament committee

The EU's payments law should be reviewed by a task force because virtual currencies (VCs) and the distributed ledger technology (DLT) on which they are based are becoming more established, a European Parliament committee has said. 29 Feb 2016

VCs and DLT are likely to have a "significant impact on the financial sector and beyond. This technology…enables a decentralised, rapid, resilient and rather secure means of recording any sort of transaction together with the history of previous transactions in a ‘distributed ledger’," the European Parliament's Committee on Economic and Monetary Affairs has said.

The Committee called for the task force to be set up by the European Commission to provide the technical and regulatory expertise that is needed. 

This task force should be "equipped with a proper budget and staffed with regulators and external technical experts dedicated…to the monitoring of DLT-based applications, identifying standards for best practice, and, where appropriate, recommending regulatory measures," it said.

DLT technology could dramatically lower transaction costs for payments and transfers of funds, potentially to below 1% compared to 2% to 4% for traditional online payment systems, and total costs for remittances globally could be reduced by up to €20 billion, the report said.

DLT could also reduce financial exclusion, cutting the cost of access to finance without a traditional bank account, the Committee said, while the decentralised architecture of DLT could improve the speed and resilience of payment systems.

Non-finance applications are likely in areas where reliability, proof of identity and ownership and standardisation are important: smart contracts, intellectual property transfers, supply chain management and a number of government services, the Committee said.

There are still issues to be resolved with the technology, including the potential for use in money laundering, terrorist financing and tax fraud because of the 'pseudonymity' that some services allow. There is also a need for flexible and reliable governance structures and regulation, the report said.

Financial technology expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said: "This shows the increasing importance of DLT technology. A lot of the focus has been on the financial services sector, but DLT has applications that go beyond financial services. The Committee is also picking up on the key issue of ensuring trust in the technology through the application of the regulatory regime – without trust, the hype of DLT will not live up to reality."

The UK government last week outlined how the use of blockchain, a type of DLT, could improve the efficiency and accuracy of public services management.

"Distributed ledger technologies have the potential to help governments to collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and generally ensure the integrity of government records and services," Mark Walport, chief scientific adviser to the UK government, said in the report.

The new report backed the creation of new standards on privacy and security relating to use of DLTs and called on the UK government to "consider how to put in place a regulatory framework for distributed ledger technology".