Global Crypto Regulations for DeFi Backed by France's Markets Regulator
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France's markets watchdog, the Autorité des Marchés Financiers (AMF), said it fully supports globally coordinated, clear regulation for decentralized finance (DeFi) in order to protect users while fostering the novel and innovative sector's growth.
The AMF published its paper on DeFi on Monday, aiming to share its preliminary thinking on DeFi by providing a definition of what constitutes it, trends observed so far, and the ecosystem overview.
It focused more in‐depth on areas such as decentralized trading protocols and governance‐related mechanisms.
The paper also aims to raise discussion points that may be useful in a regulatory context.
Therefore, said the AMF, the views presented in the paper seek to encourage discussions with ecosystem stakeholders, aiming to foster the emergence and development of a balanced regulatory framework that “will help support the sound development of decentralised finance in the long run.”
French Autorité de Contrôle Prudentiel et de Résolution (ACPR) has already made and submitted for consultation certain proposals for DeFi regulation, it said.
And it does not stop on the national level, the AMF suggested. The paper said that,
“Due to the cross‐border nature and reach of DeFi activities, the AMF also supports the development of a global coordinated approach towards regulation to ensure a global level‐playing field, which should both aim to protect investors and foster innovation.”
The European Commission will soon see the much-anticipated Markets in Crypto‐Assets (MiCA) regulation enter into force on the EU level: it will need to assess DeFi-related developments and evaluate the need to regulate the sector.
Additionally, the work by international entities, such as IOSCO49 and the FSB50, will further clarify guidance and recommendations for jurisdictions in terms of regulating DeFi.
All that said, the coming years may well be “a crucial period” for the DeFi sector, said the markets regulator, facing a 2-in-1 key challenge:
allowing for the development of transparent and safe means to help grow the ecosystem and encourage innovation,
providing adequate levels of investor protection.
DeFi is No Stranger to Disruption
The AMF said that blockchain has provided an “innovative and disruptive mechanism” that has “challenged the technological infrastructure upon which the digital economy is built.”
DeFi, building on the use of blockchain, is “no stranger to such disruption,” it added.
However, it warned, while DeFis novel approach to traditional financial services may provide opportunities for technological innovation, it also leads to risks and challenges.
This was clearly seen during the crash of the Terra/LUNA protocol in May 2022, said the AMF.
Terras dramatic fall also pointed to a lack of clarity in operating such protocols, further emphasizing the need for an unambiguous framework.
This framework would need to include safeguards that would allow better information‐sharing and protect DeFi users “in order to foster trust in the ecosystem and the innovation it brings.”
The regulator argued that,
“With DeFi still being at an early stage of development, yet evolving rapidly as a sector, legislation should be thought in a progressive and proportionate manner, taking into account on the one hand the benefits to innovation displayed by DeFi activities and governance models, while on the other considering the risks they pose to participants.”
The AMF said that the views expressed in the paper are not its official position and that it welcomes respondents opinions on them until September 30.