EU Commission analysts want a different approach to regulating the DeFi sector

European Commission’s analysts demonstrated a surprising comprehension of how DeFi works, defining it as something different from the standard financial system and recognizing that it would necessitate a shift in regulatory thinking.

Patrick Hansen, a crypto venture advisor at Presight Capital and a long-time European regulatory specialist, highlighted some key insights from the EU Commission’s “European Financial Stability and Integration Review 2022” on Monday. A 12-page chapter on DeFi is included in a report dated April 7, in which the authors exhibit a reasonable approach to the problem.

1/ In case you missed it, the EU commission wrote a chapter on DeFi in its "Financial stability & integration review 2022"

It shows that the Commission staff is well aware of how DeFi works, incl. single protocols.

A few selected quotes wrt policy 👇https://t.co/K2GOpRBTWk pic.twitter.com/SrwYb4lXGV

— Patrick Hansen (@paddi_hansen) May 2, 2022

DeFi is “a newly emerging form of autonomous financial intermediation in a decentralized digital environment powered by […] ‘smart contracts’ on public blockchains,” according to the report. It recognizes smart contracts as “substitutes for regulated intermediaries” and advises regulators to concentrate their efforts on dialogue with the DeFi teams that design these contracts.

The paper highlights the benefits of DeFi

The report went on to highlight the difference between the traditional financial system and DeFi and recognized the primary benefits of the latter:

“Compared to the traditional financial system, DeFi claims to increase the security, efficiency, transparency, accessibility, openness, and interoperability of financial services.”

Researchers and supervisors will benefit most from the public blockchain because they will have unlimited access to the whole time series of historical and real-time trade data, which will enable them better comprehend the hazards that “often remain obscure in the traditional financial system.”

The paper underlines DeFi’s potential for lower financial audit costs and significant cross-border financial integration opportunities, among other things. It also promotes a rational regulatory approach, recommending a move from an entity-based to an activity-based policy:

“However, it is obvious that simply copying traditional regulatory approaches in a decentralized environment may not be an option, since they have traditionally focused on intermediaries that play a central role in the financial system.”

European Commission is known for its active steps toward regulating crypto in the region. It recently included crypto while imposing sanctions on Russia and Belarus. The commission is also aiming to bring a CBDC proposal as early as 2023, as TheCoinRise reported.