European Commission Eyes Regulations for Decentralized Finance Sector by 2024
Summary:
The European Commission is considering introducing regulations for decentralized finance (DeFi) protocols in Europe, driven by the regulatory framework set by Markets in Crypto-Assets (MiCA). The Commission must prepare a report by December 2024, examining the DeFi market and the viability of sector-specific regulations. No policy decisions have been made yet, but the potential regulations could affect the legal viability of some crypto projects and include licensing requirements for certain DeFi interfaces. Regulators will look at factors such as whether a professional service is being performed and the level of control over DeFi arrangements, among other things.
Europe-based decentralized finance (DeFi) protocols may be subject to new regulations as the European Commission reviews the sector. Based on the requirements outlined by the regional regulator, Markets in Crypto-Assets (MiCA), a report evaluating the DeFi market along with any appropriate regulations need to be prepared by the commission by the end of December 2024. Cointelegraph was told by a Commission representative that steps for the development of this report are being taken, such as conducting a study on embedded supervision, but no policy decisions have been made yet.
The report is meant to look into the regulation of decentralized systems, specifically those without an obvious issuer or service provider. Maxim Galash, CEO of CoinChange Financials, explains in an analysis that the central focus of this evaluation will be the examination of crypto-asset lending and borrowing regulations, a primary function in the DeFi sector. DeFi represents a transition from conventional centralized financial systems to decentralized peer-to-peer finance made possible through blockchain technologies.
The scope of traditional finance laws is limited to regulating centralized institutions like banks, but decentralized systems function without any intermediaries. Source: DefiLlama indicates the worldwide total value locked on DeFi protocols.
Potential new regulations have prompted concerns over the legality of certain crypto projects. For instance, Rune Christensen, co-founder of MakerDAO, is concerned that certain DeFi systems, such as decentralized exchanges, could possibly be necessitated to attain a license under these regulations. In Christensen's view, this would result in the impossibility of DeFi frontends on regular internet platforms, as we are familiar with currently. He further expresses his thoughts through X (previously Twitter).
Expressing a similar sentiment, Nathan Catania, partner at XReg Consulting, thinks that potential regulations on DeFi would apply to all non-fully decentralized applications, including DeFi frontends. According to Catania, the MiCA regulation lacks a clear definition of what decentralization signifies, and the extent of DeFi regulations depends heavily on the set criteria defining the concept. Catania adds that even protocols that aren't decentralized enough could be seen as performing Crypto-Asset Service Provider (CASP) services, which includes the exchange of digital assets.
Pursuant to MiCA regulation, any entity that offers services related to digital assets to third parties, which includes exchange, transfer, and custodian wallet services, is classified as a CASP.
In Catania's view, one key factor that might be considered by regulators while assessing the level of decentralization is whether a professional service is being performed. He cites an example stating that a frontend providing only an interface to access DeFi without control over users' assets and doesn't charge a fee is less likely to be at risk than a frontend that imposes a fee.
DeFi regulation might also proceed through the Financial Action Task Force (FATF). According to Galash from Coinchange, the FATF proposes that individuals or entities with control or significant influence over DeFi arrangements may be recognized as Virtual Asset Service Providers (VASPs) even if the arrangements appear decentralized.
As reported by DefiLlama, there has been a substantial increase in the total value locked (TVL) in DeFi protocols over the last four years, rising from $570 million in April 2020 to $96.7 billion currently, demonstrating a growth of 16,865% over this period. Catania suggests that the critical question is whether the DeFi arrangement is a mere technological arrangement or if there's a controlling entity that can influence users' value. Additional reporting by Helen Partz. The billion-dollar secret of DeFi is hacks by insiders.
Published At
4/4/2024 9:05:14 PM
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