Decentralized finance (DeFi) projects may soon face increased regulation as policymakers seek to extend existing crypto laws to cover more diffuse structures, according to a report by the French central bank. The report, released by the Autorité de contrôle prudentiel et de résolution or ACPR (a division of the French central bank that supervises insurers and banks) , the arm of the central bank that supervises banks and insurers, highlights the need for new regulatory frameworks for DeFi due to its disintermediated nature.
“The regulation of disintermediated finance cannot simply replicate the systems that currently govern traditional finance,” the report stated. One option proposed by the ACPR is to require players exercising effective control over sensitive services to incorporate and become subject to supervision. Additionally, the report suggests strengthening the security of smart contracts through a certification mechanism that covers code security and governance.
The report also highlights concerns about the sale of highly leveraged products to regular retail investors in DeFi. It notes that DeFi often allows high-risk products to be used, which in traditional finance would be restricted to seasoned professionals. The proposed rules aim to protect retail investors from potential risks associated with such products in the DeFi space.
ACPR also aims to extend planned European Union consumer protection rules to cover DeFi explicitly. This comes as lawmakers in the EU are set to vote on the Markets in Crypto Assets regulation (MiCA) next week, which will regulate centralized players like exchanges and wallet providers. The ACPR’s proposal aligns with the broader global trend of increased regulatory scrutiny on the crypto sector, as policymakers seek to address concerns around money laundering, illicit fund raising, and consumer protection.
The report comes at a time when the legal status of decentralized autonomous organizations (DAOs) is being considered by the Legal High Committee for Financial Markets of Paris (HCJP). The HCJP, a grouping of regulators and lawyers, is set to release its report in the fall, following in the footsteps of the Law Commission of England and Wales, which has highlighted the potential for innovative finance to disrupt traditional property norms.
The proposed regulation of DeFi projects could have significant repercussions on the emerging metaverse and the broader crypto sector. DeFi projects have gained popularity in recent years due to their decentralized and permissionless nature, offering individuals greater financial autonomy and access to financial services. However, increased regulation could potentially stifle innovation and limit the accessibility of DeFi projects to retail investors.
Proponents of DeFi argue that it has the potential to revolutionize the financial industry by providing inclusive financial services to underserved populations and disrupting traditional intermediaries. However, critics express concerns about the lack of regulatory oversight and potential risks associated with the anonymity and decentralization of DeFi projects.