Digital Finance in Europe: Law, Regulation, and Governance by Avgouleas

Emilios Avgouleas and Alexandros Seretakis
Governing the Digital Finance Value-Chain
in the EU: MIFID II, the Digital Package,
and the Large Gaps between!
Abstract: The emergence of the complete digitization of the financial services
value chain has gathered pace due to the advent of the Covid-19 pandemic. It
is mainly premised on automation of the investment process through the use
of algorithmic tools and remote delivery of services via integrated platforms
and apps. During the same period, we have witnessed the emergence of decen-

tralised finance, cryptocurrencies aside, and the increased use of blockchain
technology. Together these developments promise radical changes in market
structure and microstructure. The digitization of the finance value chain could
cause respectively more market concentration or conversely radical democratisa-

tion of investment markets. For this reason, the choices of policy-makers will be
of cardinal importance. At the same time, digitisation is the best opportunity so
far to create a fully integrated EU market for new listings and secondary trading
in securities, and to further SME access to finance, thus making reality the vision
of an EU Capital Markets Union. While these developments raise critical chal-

lenges for EU policy-makers in the post-Brexit era, the regulatory landscape in
the EU is still dominated by the older MIFID II approach to market regulation.
Reform attempts seem over-cautious and unwilling to unleash the powerful
forces of technology and innovation to avoid upsetting settled industry practices
(and incumbent oligopolies). EU Regulation has to become more proactive foster-

ing regulatory experimentation in tandem with technological one to make sure
that consumers interests are safeguarded, competition is furthered, and essential
finance infrastructure is not dominated by a tight rent-seeking oligopoly. There-

fore, the EU Digital Finance package in its present form is a welcome yet timid
step forward. A number of further reforms are required to accelerate the pace
of regulatory adaptation to the challenges and opportunities of the new digital
era for European markets strengthening post-Covid 19 economic recovery

Keywords: MiFID II, Decentralised Finance, Platform Finance, MiCA, EU Digital
package, Robo-advisors
Table of Contents
 1. Introduction - 2
 2. The Digitization of the Financial Services Value-Chain: Opportunities and Risks - 8
 2.1 The Centralised Platform Model and Network Effects - 9
 2.2 Decentralised Finance: Can It Unbundle the Network Effect? - 13
 2.3 Market Microstructure, DeFI, and EU Financial Market Integration - 17
 3. The Digital Value-Chain in Finance and MiFID II - 22
 3.1 The Ambit of the MiFID II Regime for Robo-Advisors - 23
 3.2 MIFID II and Trading Venues - 24
 3.3 Fintech Platforms and the MIFID II Product Governance Regime - 26
 3.4 Evaluation of MiFID II - 28
 4. DLT Platforms and the New EU Pilot Regime - 28
 5. Conclusions and Recommendations - 32
1 Introduction
For some time now the value chain in financial services is being disrupted and
reconfigured due to outside developments such as restrictive regulation, the evo-

lution of information communications technology (ICT) and financial innovation
in the form of development of new products. Moreover, ICT and tolerant regula-

tors have allowed financial services firms to disaggregate the financial services
value chain into front, middle, and back offices. Back-office functions ranging
from client on-boarding to transaction processing/verification and storage of

Digital Finance in Europe: Law, Regulation, and Governance by Avgouleas