The Association for Financial Markets in Europe (AFME), in an attempt to mitigate potential risks to financial stability, has made a clear call to regulators: DeFi, the burgeoning sector of decentralized finance, must not be excluded from the recently adopted Markets in Crypto Assets (MiCA) regulations. AFME argues that excluding decentralized activities could open floodgates for regulatory arbitrage, thereby weakening the newly implemented frameworks.
The MiCA, scheduled to come into effect in December 2024, is a landmark in crypto legislation. However, it notably omits certain facets of the crypto ecosystem, including DeFi and nonfungible tokens (NFTs). This exclusion, AFME warns, could be a source of unintended consequences that could destabilize the financial market.
In a paper titled ‘Decentralised Finance – Principles for Building a Robust Digital Economy,’ AFME addresses the European Council, stating, “While the current overlap of DeFi and Traditional Finance (TradFi) is not yet significant, this should be actively monitored and managed.”
AFME proposes a comprehensive taxonomy for DeFi
In an effort to tackle DeFi’s unique challenges, AFME is urging the EU to develop a comprehensive taxonomy to classify DeFi activities and digital assets. This would assist in creating a robust regulatory response, potentially preventing the unintended risks they have highlighted.
The Association views DeFi as an important innovation within the financial system and an outsourced research and development lab for the formal sector. As such, the AFME is advocating for a risk-based approach to DeFi regulation, with a consistent framework that considers varying degrees of centralization.
Although their recommendations aren’t being presented as definitive solutions, they represent a critical first step in the broader conversation about DeFi and its place in our digital economy. The aim is to catalyze discussion within the industry and to work toward innovative policy solutions for DeFi with the participation of both the public and private sectors.
Presently, the MiCA regulations are in the consultation phase, with the European Union embarking on a three-part consultation process this July. The suggestions collected during this phase will be reviewed and potentially approved by the European Commission, European Parliament, and European Council, thus shaping the future of crypto regulation in Europe.