Projects in decentralized finance, or DeFi, may have to meet governance and security norms or incorporate them, as regulators look to extend proposed cryptocurrency laws to cover more diffuse structures, according to a report by the French central bank.
What Happened: As regulators increasingly focus on financial services without a central intermediary, the ACPR — the arm of the central bank that supervises banks and insurers — said in a consultation paper that DeFi regulations cannot simply replicate those that currently govern traditional finance, reported Coindesk.
The consultation is open until May 19.
The report suggests that "players exercising effective control over sensitive services could be required to incorporate, becoming subject to supervision," and proposes to "strengthen the security of smart contracts using a certification mechanism" covering code security and governance.
In addition, the report notes that new rules should prevent intermediaries from selling highly leveraged products to retail investors, as DeFi often allows high-risk products to be used that would be restricted to seasoned professionals in regular finance.
The Legal High Committee for Financial Markets of Paris is also currently examining the legal status of decentralized autonomous organizations, or DAOs, and is set to report in the fall.
The ACPR wants to "explicitly" extend proposed European Union consumer protection rules to cover DeFi and plans to incorporate them in the forthcoming legislation. The Markets in Crypto Assets regulation, or MiCA, will regulate centralized players like exchanges and wallet providers.
In light of recent developments, policymakers and regulators are becoming increasingly concerned about the potential risks associated with DeFi. Last week, the U.S. Treasury called for stricter money laundering controls, warning that DeFi was being used to raise illicit funds for North Korea.
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