EU Shifts Regulatory Focus to DeFi, Report Highlights Likely Policy Direction
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EU Shifts Regulatory Focus to DeFi, Report Highlights Likely Policy Direction

EU could introduce several new policy changes to improve DeFi regulation as current policies are considered "inadequate."
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EU could introduce new regulations to address major threats DeFi presents as standard policies are “inadequate to the treatment of DeFi services,” said European Commission’s Mattias Levin today. Levin’s remarks came during a webinar focused on European Commission’s report published earlier this week on DeFi regulation and supervision.

Current Financial Policies “Inadequate” to Regulate DeFi, says European Commission Executive

Current financial regulations are not established enough to regulate the rapidly-growing decentralized finance (DeFi) space, according to European Commission’s report “Decentralized Finance: information frictions and public policies,” published earlier this week.

During today’s webinar outlining the report, Mattias Levin, Deputy Head of Unit of European Commission’s digital finance division, said the report represents a “part of our ambition to understand DeFi further, to inform our thinking about how to address any concern potential public policy consequences.” The report notes that current financial policies are “inadequate to the treatment of DeFi services” and puts forward several policy proposals aimed at improving DeFi regulation.

One of the proposals outlined in the report was to establish an individual policy focused on regulating entities that are “legally subjected to the authority of standard public institutions.” Under the current regulatory framework, lawmakers do not theoretically have the power to regulate entities outside the DeFi space, the report adds.

In addition, the report also proposes a voluntary compliance framework that would regulate both protocols and legal bodies. In this case, protocols and DeFi users would be able to choose to abide by some policy rules in order to win “different forms of public support and guarantee such as a stamp of public approval.”

Among other things, the European Commission also suggests establishing a public observatory based on public opinions and on-chain data. The observatory would be responsible for opening a public investigation and would issue public warnings regarding high-risk DeFi protocols and activities.

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EU Ramps Up Efforts to Regulate the Crypto “Wild West”

Earlier this month, the European Parliament voted in favor of the Markets in Crypto Assets Regulation (MiCA) bill, introduced in June 2022. MiCA represents comprehensive legislation aimed at regulating the “crypto wild west,” particularly stablecoins and crypto exchanges.

The parliament voted 28-1 in favor of the bill, and the EU Council is expected to approve the legislation by the end of October, before it goes into effect in 2024. The announcement pushed Bitcoin below the $19,000 threshold, with the world’s biggest cryptocurrency losing over 50% in the past six months.

The European Union has been doubling down on regulating the crypto space to protect consumers following a series of hacks and crypto firms’ collapses in 2022. Recent research by Chainalysis showed that DeFi has been particularly exposed to exploits, with hackers stealing $1.3 billion from crypto platforms in the first three months of the year.

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Do you think it is possible to create a comprehensive regulatory policy for DeFi? Let us know in the comments below.