Analysts from the European Commission showed an unexpected understanding of how decentralized finance (DeFi) actually works, having defined it as something different from the traditional financial system and acknowledging that it would require rethinking the approach to regulation.
On Monday, May 2, Presight Capital crypto entrepreneurship advisor and longtime European regulatory expert Patrick Hansen, shared some important details from the European Commission report “European Financial Stability and Integration Review 2022”. The report, dated April 7, contains a 12-page chapter on DeFi, in which the authors demonstrate a no-nonsense 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
— Patrick Hansen (@paddi_hansen) May 2, 2022
1/ In case you missed it, the EU Commission wrote a chapter on DeFi in its “Financial stability & integration review 2022”
It shows that Commission staff are well versed in how DeFi works, including the unique protocols.
Some selected quotes about politics
The report defines DeFi as “an emerging form of autonomous financial intermediation in a decentralized digital environment powered by […] “smart contracts” on public blockchains”. He acknowledges that smart contracts are “substitutes for regulated intermediaries” and suggests that regulatory efforts focus on communicating with the specific DeFi teams that create these contracts.
Underlining the difference between tDeFi and the traditional financial system, the report recognizes the main advantages of the former:
“Compared to the traditional financial system, DeFi aims to increase the safety, efficiency, transparency, accessibility, openness, and interoperability of financial services.”
Particular attention is paid to the potential of public blockchain for researchers and supervisors, who can have free access to the entire time series of real-time and historical trade data, which, in turn, could facilitate a better understanding of risks. that “often remain obscure in the traditional financial system”.
Among other things, the report highlights the potential of DeFi to reduce the costs of financial audits and the significant opportunities for cross-border financial integration. It also advocates a sensible approach to regulation, proposing a move from an entity-based strategy to an activity-based one:
“However, it is obvious that simply copying traditional regulatory approaches in a decentralized environment may not be an option, as they have traditionally focused on intermediaries that play a central role in the financial system. Adapting the regulatory framework to a decentralized environment can be challenging and would require a rethink of how we approach regulation.”
As Hansen concludes, despite the “troubling take on the regulation of […] the project teams and the code”, 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 contentious episodes in the EU regulatory routine—a last-minute reversal of a planned ban on PoW mining in the MiCa project and the attack on non-custodial purses in the amendments to the Funds Transfer Regulations.
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