Europe Eyeing Stricter Rules for DeFi

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The European Systemic Risk Board (ESRB), the EU's financial stability authority, has voiced concerns that the rapidly expanding digital asset and decentralized finance (DeFi) sectors could pose a systemic threat to the economy. This warning has led to suggestions that further regulations may be needed to oversee major crypto conglomerates and smart contracts.
With the new Markets in Crypto Assets (MiCA) regulations set to be enacted in the EU in 2024, the ESRB's Thursday report highlighted potential risks associated with crypto lending, staking, and high leverage in digital asset markets. The watchdog, chaired by EU central bank head Christine Lagarde, suggested options for additional policies. For instance, DeFi developers might be required to adhere to specific regulations regarding the design and creation of smart contracts. The report also suggested mandatory code audits, restrictions akin to those in the pharmaceutical industry, and rules governing "oracles" that supply real-world data to automated software. 

While MiCA establishes guidelines and requirements for wallet providers and stablecoin issuers, it does not directly address areas such as crypto lending and staking. The ESRB warns that these areas may pose "significant risks to consumers." Furthermore, under MiCA, firms will have to manage potential conflicts of interest across their operations, but there are no comprehensive requirements to identify and mitigate operational or reputational risks arising from offering services like trading and custody.

The ESRB's report suggests studying the activities of crypto-asset conglomerates in the EU, taking into consideration market developments and experiences with MiCA's application. It cited existing payment laws enabling supervisors to mandate risky services to divest to a separate subsidiary.

While acknowledging the volatile year for crypto-assets and DeFi, the ESRB's report emphasizes that no systemic implications have surfaced yet. However, it cautions that "exponential growth dynamics" could potentially lead to a major threat akin to the 2008 collapse of Lehman Brothers.

GN Crypto