May 25, 2024
Europe's Impending DeFi Regulations May Prohibit Non-Decentralized Protocols
Policy & Regulation

Europe’s Impending DeFi Regulations May Prohibit Non-Decentralized Protocols

As the decentralized finance (DeFi) sector continues to gain momentum, the European Commission is evaluating potential regulations that could reshape the landscape of digital assets within Europe.

MiCA Regulation and Regulatory Evaluation

Under the Markets in Crypto-Assets (MiCA) framework, the European Commission is mandated to prepare a report by December 30, 2024, assessing the decentralized finance market and the feasibility of implementing specific regulations for the sector.

“In preparation for this report, we have initiated several actions. For instance, we are running a study on embedded supervision. No policy decisions have been taken yet,” a Commission spokesperson informed.

The report aims to delve into the regulatory considerations surrounding decentralized systems, particularly those lacking a clear issuer or service provider.

Maxim Galash, CEO of CoinChange Financials, emphasized that a significant aspect of this assessment would be exploring the regulation of crypto-asset lending and borrowing, which constitutes a core activity within the DeFi space.

Concerns and Potential Impact

The prospect of new regulations has sparked concerns within the crypto community, particularly regarding the legal viability of certain projects.

Rune Christensen, co-founder of MakerDAO, expressed apprehension that the rules could subject some DeFi interfaces, such as decentralized exchanges, to licensing requirements.

Nathan Catania, a partner at XReg Consulting, echoed similar sentiments, highlighting the ambiguity surrounding the definition of decentralization and its implications for DeFi regulations.

Factors in Regulatory Evaluation

Catania emphasized that regulators might assess the level of decentralization based on various factors, including whether a professional service is being performed.

He suggested that front-ends providing users access to DeFi without controlling users’ funds and without charging fees might be less likely to face regulatory scrutiny.

Another potential avenue for DeFi regulation could be through the Financial Action Task Force (FATF).

Galash noted that the FATF proposes categorizing individuals or entities with control or significant influence over DeFi arrangements as Virtual Asset Service Providers (VASPs), regardless of the appearance of decentralization.

Rapid Growth of DeFi

Data from DefiLlama illustrates the remarkable growth of the DeFi sector, with the total value locked (TVL) in DeFi protocols surging from $570 million in April 2020 to $96.7 billion presently, marking a staggering 16,865% increase over the period.

Global total value locked on decentralized finance protocols. Source: DefiLlama.

As discussions surrounding DeFi regulations evolve, the central question remains whether DeFi arrangements are purely technological or if there exists a controlling entity capable of influencing user value.

The outcome of regulatory deliberations could significantly shape the future trajectory of decentralized finance within Europe and beyond.


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