The Association for Financial Markets in Europe (AFME), an industry advocacy group representing wholesale market participants, has called for the decentralized finance (DeFi) sector to be included within the upcoming markets in crypto assets (MiCA) regulations in Europe. MiCA, set to take effect in December 2024, is considered the first comprehensive crypto legislation. However, it currently excludes certain aspects such as DeFi and nonfungible tokens (NFTs).
In a paper addressed to the European Council, AFME highlighted that the exclusion of DeFi could pose unintended risks to financial stability and have potential knock-on impacts. While acknowledging that the overlap between DeFi and traditional finance is currently not significant, AFME emphasized the importance of actively monitoring and managing this intersection.
To address these concerns, the trade body recommended the establishment of a taxonomy for DeFi activities and digital assets using a risk-based approach. They also suggested the need for a consistent regulatory framework considering the unique characteristics of decentralized ecosystems like DeFi. This framework should allow for different levels of centralization to accommodate the diverse nature of DeFi projects.
AFME clarified that their recommendations should be seen as a starting point for discussion rather than a definitive solution. Their aim is to initiate a dialogue across the industry to explore technical issues posed by DeFi and propose initial regulatory approaches for this emerging area of digital finance. The trade body intends to collaborate with both public and private sectors to foster innovative policy solutions for DeFi.
MiCA is currently undergoing a consultation phase, during which the European Union will gather feedback through a three-part consultation process starting in July. The suggestions and measures collected during this phase will be subject to approval by the European Commission, European Parliament, and European Council.
In conclusion, the AFME’s call to include DeFi in the MiCA regulations highlights the need for comprehensive regulation that addresses the unique characteristics and risks associated with DeFi. By advocating for a risk-based approach and a taxonomy specific to DeFi activities, the trade body aims to contribute to the development of a robust regulatory framework that ensures financial stability while fostering innovation within the DeFi sector.