Europe’s New DeFi Rules Target Non-Decentralized Protocols

The European Commission is evaluating decentralized finance protocols in Europe and considering new regulations for the sector. As part of this evaluation, the commission must prepare a report by December 2024, exploring how decentralized systems should be regulated. One aspect the report will focus on is the regulation of crypto-asset lending and borrowing within the decentralized finance (DeFi) space. This potential regulation has raised concerns about the legal viability of certain crypto projects, as it may require decentralized exchanges and other DeFi interfaces to obtain licenses. The extent of DeFi rules under the new regulations will depend on the criteria used to determine the level of decentralization.

The regulatory framework governing digital assets in Europe, known as the Markets in Crypto-Assets (MiCA), defines Crypto-Asset Service Providers (CASP) as entities that provide services related to digital assets to third parties. This includes exchange services, transfer services, and custodian wallets. The level of decentralization and the performance of professional services will likely be factors regulators consider when evaluating whether a front-end interface should be licensed under MiCA. Front-ends that simply provide users with access to DeFi without controlling users’ funds and without charging fees are considered to be at a lower risk of regulation.

Another possible route for DeFi regulation is through the Financial Action Task Force (FATF). The FATF proposes that individuals or entities maintaining control or significant influence over DeFi arrangements may be categorized as Virtual Asset Service Providers (VASPs), regardless of whether the arrangements appear decentralized. This highlights the challenges in defining and regulating DeFi activities.

The value locked in DeFi protocols has seen significant growth over the past four years, reaching $96.7 billion at the time of writing. The key question for regulators is whether a DeFi arrangement is a purely technological arrangement or if there is a controlling party that can influence user value. The report prepared by the European Commission will help determine the future regulations for decentralized finance protocols in Europe.

2 thoughts on “Europe’s New DeFi Rules Target Non-Decentralized Protocols

  1. The significant growth in value locked in DeFi protocols is a testament to the potential of this sector. Proper regulation will support its further development and prevent potential risks.

  2. The evaluation of decentralized finance protocols shows that regulators are taking the time to understand the technology and its potential impact on the financial industry. 📈

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