European Union Wide Uniform Regulations for DeFi Suggested by German BaFin

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The Executive Director at Germany’s Federal Financial Supervisory Authority (BaFin), Birgit Rodolphe, is calling for a uniform system of regulation of DeFi for the whole of the European Union. "Highlighting Germany’s crypto license as an example of attractive regulation, Birgit Rodolphe writes that similar frameworks should be the same throughout the EU to 'prevent a fragmented market” [Coghlan, J. German BaFin official calls for ‘innovative’ EU-wide DeFi regulation. (Accessed May 18, 2022)].

BaFin is the regulatory authority in Germany for banks, insurance businesses, as well as financial institutions which include cryptocurrency concerns. Within German borders, a 'crypto custody license' is necessary for all companies wishing to offer cryptocurrency services which license is issued by the BaFin.

Recognizing that DeFi is still an immature niche market, Rodolphe warns:

One thing is clear: the clock is ticking. The longer the DeFi market remains unregulated, the greater the risk for consumers. And all the greater is the danger that critical offers that have systemic relevance will establish themselves. We should therefore actively set regulatory cornerstones for new offers and thus enable innovative providers to implement their offers with legal certainty. The introduction of the crypto custody business shows that innovative regulation can even be particularly attractive. (emphasis added)

[Rodolphe, B. Future without supervision? Decentralized finance as a challenge for financial supervision. (Accessed May 18, 2022)].

Her reasoning in this regard is based on the following:

Despite all the enthusiasm for the technical innovations that make DeFi possible: The use of a new technology for customer contact does not mean that this business model gets regulatory carte blanche. Anyone who provides services that require a license in a country is subject to the supervisory law there....However, if DeFi is to become a real competitor to the traditional financial market, this will not work without specific new regulation.

[Id].

And to maximize effectiveness, she suggests:

Ideally, such requirements would of course be uniform throughout the EU in order to prevent a fragmented market and to leverage Europe's entire innovation potential. Of course, the result of regulatory considerations cannot be that we weaken established standards or make DeFi offers better in terms of regulation than comparable offers in the traditional financial market.

[Id].

In presenting her argument, Rodolphe raised the risks faced by consumers in DeFi of 'technical issues, hacks, and fraudulent activity' resultant in the loss of millions. Furthermore, she advances that DeFi isn’t as 'democratic and altruistic' as many say and that DeFi products are 'difficult for many to grasp.' As such, she maintains that the DeFi platforms should not be allowed to operate absent regulation merely due to the fact they utilize new technology, stating:

utopia? Or rather dystopia? Who do I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear altogether?

[Id].

And finally, worthy of note, Rodolphe believes "that new DeFi regulations can’t be weaker than the standards already in place with traditional financial products, as it could make DeFi products more attractive for businesses to pursue from a regulatory point of view" [Coghlan, supra].

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