German BaFin official calls for uniform Defi regulation across the EU

  • Birgit Rodolphe, executive director at Germany’s Federal Financial Supervisory Authority (BaFin), has said that regulators must come up with rules to give Defi providers legal clarity.
  • She believes that the Defi regulation must be uniform across the EU. 

The Decentralized Finance (Defi) space has boomed with billions of dollars locked in various platforms. However, the unregulated space exposes investors to a lot of risks, undermining the potential of the Defi ecosystem. As a result, Birgit Rodolphe, executive director at Germany’s Federal Financial Supervisory Authority (BaFin), has stated that there should be a uniform regulatory framework across the European Union to guide the space. According to her, the unregulated Defi industry is a ticking time bomb.

One thing is clear: the clock is ticking. The longer the Defi market goes unregulated, the greater the risk for consumers, and all the greater is the danger that critical offers that have systemic relevance will establish themselves.

Having recognized that users have lost millions of Dollars through fraudulent activities, hacks, and technical issues in the crypto sphere, she stated that this is possible in the Defi industry as many of its products are very difficult to understand. Also, despite how appealing its new technologies look, Rodolphe pointed out that there is no deposit protection fund that would secure vulnerable users.

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? In any case, there is no deposit protection fund for such cases.

The Defi industry cannot survive outside regulation

She believes that regulators must come up with rules to give Defi providers legal clarity. The ecosystem is not beyond regulation, so products outside the traditional financial system like lending, borrowing, etc must be subjected to licensing and supervision according to her. 

In 2020, BaFin introduced a “crypto custody business” license for companies that seek to offer crypto services in Germany. Drawing inspiration from this, she suggested that the regulatory framework should be uniform across the EU. This will in addition to preventing a fragmented market also ensure that Europe’s entire innovation potential is leveraged. 

The Defi space is booming as many traders have resorted to derivative and arbitrage strategies on Defi apps for higher returns. The Total Value Locked on various Defi platforms had grown to over $100 billion as of June 2021. Interestingly, $64 billion was on Ethereum. In the previous year, only $1 billion was on Ethereum. However, the market is very risky and immature. The reliability of some of these platforms is very difficult to determine as those running the apps usually do so anonymously. In 15 different attacks, $120 million was stolen from Defi protocols in 2020. Lack of insurance and regulation makes it difficult for a recourse when a platform fails.

According to Rodolphe, new regulations must not be weaker than the standard traditional financial products are working with. 

Related: Bitcoin to be untaxed if held for more than a year in Germany

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