Birgit Rodolphe, CEO of Germany’s Federal Financial Supervisory Authority (BaFin), has called for innovative and uniform regulation of the decentralized finance (DeFi) space across the European Union..
The BaFin is Germany’s financial regulatory body responsible for regulating banks, insurance companies, and financial institutions, including cryptocurrency companies. BaFin is the issuer of the “crypto custody licences”, a permit required for companies that want to offer cryptocurrency services in Germany.
In an article published on the BaFin website, Rodolphe warned of the risks posed to consumers by the unregulated DeFi space and called for regulatory considerations to be standardized across EU member countries.:
“One thing is clear: time is running out. The longer the DeFi market is unregulated, the greater the risk to consumers, and the greater the danger of critical offerings being established that have systemic relevance.”
He cited the risks to consumers of “glitches, hacks, and fraudulent activities” that have cost millions and claimed that DeFi is not as “democratic and altruistic” as its fans say and that DeFi products are “difficult for many to understand.”. He concluded that DeFi protocols are not free to operate outside of regulations simply because they use new technologies:
“Utopia? Or rather a dystopia? Who should I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear? In any case, there is no deposit protection fund for these cases.”
He added that loans, borrowing, insurance and other products outside the traditional financial system are subject to licensing and supervision where they are offered, and called on regulators to establish rules that give legal clarity to DeFi providers.
Rodolphe highlighted BaFin’s “cryptocurrency custody business” license, introduced in January 2020, as an “attractive” regulatory regime for crypto businesses..
The license allows companies to offer cryptocurrency services in Germany. Currently only four providers are approved, but many financial institutions have applied. Rodolphe wrote that the regulatory frameworks should be the same in the different European countries:
“Ideally, these requirements should be uniform across the EU to avoid a fragmented market and harness the full innovation potential of Europe.”
Germany rose to the top spot as the most crypto-friendly country in Q1 2022 due in part to its zero-tax policy on long-term cryptocurrency capital gains.. A report from March 2022 found that almost half of Germans are interested in investing in cryptocurrencies.
Germany also made a lot of crypto-related moves throughout its government in 2021which included law reforms to embrace blockchain technology and tightening regulations on crypto companies. The country’s central bank took a leading role in testing a European Central Bank Digital Currency (CBDC).
Rodolphe concluded that the new DeFi regulations cannot be weaker than the rules already in place with traditional financial products, as it could make DeFi products more attractive to companies from a regulatory point of view.
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