Regulating DeFi in Europe: issues for consideration
Decentralised finance (DeFi) is a myriad of protocols that offer a complementary financial offer to the traditional banking and financial system. DeFi is characterised by its transparency, non-intermediation, inclusiveness, interoperability and innovation.
While the Market in Crypto-Assets (MiCA) Regulation provides a framework for centralised players operating in crypto-asset markets, the European Commission - in accordance with Article 142 of the MiCA Regulation - will soon publish a report aiming, among other topics, to assess the development of DeFi in the crypto-asset markets and the appropriate regulatory treatment of decentralised crypto-asset systems without an issuer or crypto-services provider, as well as the need for, and feasibility of, DeFi regulation.
According to Adan, traditional financial regulation may not be suitable for DeFi due to certain specificities:
- Confidence is placed in the underlying technology rather than in an intermediary;
- The legal categories for financial activities and services based on traditional financial regulation cannot be applied without nuance to decentralised applications;
- DeFi creates new technological risks that must be identified and addressed to ensure market stability and a sufficient level of trust and protection for users;
- Financial regulation - based on the territorial application of its rules - sometimes seems incompatible with DeFi protocols that do not have a classical geographical anchorage.
Therefore, it is essential to review the traditional paradigm of financial sector regulation by understanding and taking into account the specific characteristics of each DeFi protocol. Inadequate regulation would reduce the emergence of innovative projects and harm the competitiveness of the European territory in digital finance, while Europe tends to be a leader in the structuring of this sector.
Adan - which promotes the establishment of an innovative framework resulting from close and constructive discussions with the industry - thus wishes to contribute to these discussions in the construction of a framework based on confidence for users and project owners, while allowing effective supervision by the competent authorities in Europe. This report contains 9 policy recommendations to the Commission that should be taken into account in the construction of a proportionate and appropriate framework.
The Association and its members remain available to any stakeholder interested in the subject to discuss this important issue for Europe's digital competitiveness.