Italy heads towards the implementation of a legal framework on blockchain

On 18 June 2020, the Ministry of Economic Development published for public consultation a document containing recommendations on how DLT and blockchain may be applied to and improve the business in a number of fields, including the regulatory banking and financial industry (the "Recommendations"). The main Recommendations concern:

• FinTech and digital payments: fostering the developments of blockchain technology applied to payments in Italy would have a significant positive economic impact on the market and allow Italy to become an important hub at a global level in this industry.
   
• AML: the AML legal framework requires intermediaries to conduct AML checks vis-à-vis customers, including KYC. In this context, the blockchain technology may be used to trace and record the KYC carried out by an intermediary in order for other market operators to take advantage of such identification. The use of the blockchain would thus drastically reduce the time and cost to comply with KYC obligations.
  In this regard, the adoption of Self Sovereign Identity (SSI) solutions would also have a significant impact. Additional benefits may arise if the application of simplified customer due diligence measures were to be allowed under the applicable AML legal framework for crypto asset exchange transactions below a certain threshold. The thresholds currently provided with respect to e-money products may be used also in this case.
   
• Initial Coin Offering and Security Token Offering (ICO/STO): the lack of a harmonised framework at an EU level on this causes uncertainty and concerns among market players. To avoid any negative consequences for Italy in terms of international competition, both ICO/STO definitions should be clarified, ensuring a widely offering of them in the market. The Recommendations also suggest providing a definition of utility and security token. Please also see our previous newsflash.
   
• Cryptoassets: the Italian AML legal framework provides a definition and regulation of virtual currencies which differs with respect to the provisions set out under Directive (EU) 2018/843 (so-called 5AMLD). It would be necessary to align the Italian legal framework as well as to introduce a distinction between custodian and non-custodian wallet providers. Finally, the Ministry of Economy and Finance is still to enact the long awaited decree setting out the registration requirements for virtual currency services providers in a dedicated section of the OAM register. The draft of the mentioned decree published under consultation in February 2018 (please see our previous newsflash) should be reviewed accordingly and the requirements applicable to merchants accepting virtual currency as remuneration for their goods or services set out therein should be deleted.
   
• Central Bank Digital Currency: Italy may promote vis-à-vis the ECB the development of a Central Bank Digital Currency (the "CBDC"). The relevant Recommendation highlights many positive aspects of the CBDC including, among other things: (i) reduction of the costs of cash management; (ii) facilitation of access to banking services to people who normally do not have it through the use of blockchain; (iii) increase of digital money as well as smart contracts, resulting in greater use of electronic payments.

Next steps

Blockchain would have a significant impact in the financial and banking sector, but there are still many challenges to overcome in order to ensure greater use of this technology, including the lack of general awareness and understanding of advanced technological systems. A national legal framework aimed at establishing regulatory certainty and promoting European dialogue on blockchain may help address these challenges.

The consultation ends on 20 July 2020.

The consultation document is available here (Italian only).

Authored by Jeffrey Greenbaum, Claudia Colomba and Elisabetta Zeppieri