Analysts from the European Commission showed an unexpected understanding of how decentralized finances (DeFi) actually function, having defined it as something different from the traditional financial system and acknowledged that it would require rethinking the approach to regulation.ย
On Monday, May 2, a crypto venture advisor at Presight Capital and a long-term expert on European regulation, Patrick Hansen shared some important details from the EU Commission’s โEuropean Financial Stability and Integration Review 2022โ. A report, dated April 7, contains a 12-page chapter on DeFi, in which the authors demonstrate a sensible approach to the topic.
1/ In case you missed it, the EU commission wrote a chapter on DeFi in its “Financial stability & integration review 2022”
It shows that the Commission staff is well aware of how DeFi works, incl. single protocols.
A few selected quotes wrt policy https://t.co/K2GOpRBTWk pic.twitter.com/SrwYb4lXGV
โ Patrick Hansen (@paddi_hansen) May 2, 2022
The report definesย DeFi as โa newly emerging form of autonomous financial intermediation in a decentralized digital environment powered by […] โsmart contractsโ on public blockchains.โ It acknowledges the smart contracts to be โsubstitutes for regulated intermediariesโ and suggests regulatory efforts to focus on communication with the specific DeFi teams that create these contracts.
Underscoring the difference between the DeFi and the traditional finance system, the report recognizes the key advantages of the former:
โCompared to the traditional financial system, DeFi claims to increase the security, efficiency, transparency, accessibility, openness and interoperability of financial services.โ
Special attention is drawn to the public blockchainโs potential for researchers and supervisors who can have free access to the entire time series of historical and real-time trading data, which, in turn, could help to better understand the risks that โoften remain obscure in the traditional financial system.โ
Further reading: GameFi is showing signs of a mature landscape: Report
Among other things, the report highlights DeFiโs potential for lower financial audit costs and substantial opportunities for financial integration across borders. It also advocates a sensible approach to regulation, proposing to shift the balance from an entity-based to activity-based strategy:
โHowever, it is obvious that simply copying traditional regulatory approaches in a decentralised environment may not be an option, since they have traditionally focused on intermediaries that play a central role in the financial system. Adapting the regulatory framework to a decentralised environment may be challenging and would require a rethink of how we approach regulation.โ
As Hansen concludes, despite the โworrisome takes on the regulation of […] project teams and codeโ, he is pleasantly surprised by the level of knowledge that the DeFi chapter manifests. In that sense, the document comes as a relief after a series of the controversial episodes in the EUโs regulation routine โ a last-moment reversion of a planned PoW-mining ban in the MiCa draft and the attack on non-custodial wallets in the amendments to the Transfer of Funds Regulation.
