In a new report from the European Commission, the important body of the European Union writes of its intention to create a better regulatory framework for the DeFi market. For now, the European Commission sees little value in the “real economy,” but recognizes that DeFi has value in the virtual one. Later this year, it plans to launch a pilot to better monitor the DeFi world.
Interestingly, the European Commission report comes at a time when the Terra protocol has collapsed. Initially, the UST shot below the dollar and then it pulled LUNA and some DeFi projects with it. The bitcoin exchange rate is also having a hard time with Terra’s failure and has now dropped to around $29,000. With the pilot, the European Commission wants to try to better control the currently unregulated DeFi market.
Automatic verification of compliance
The idea is to put together a way of monitoring that allows projects to be checked automatically. European Commission said:
[…] we are trying to set up a mechanism for the automatic monitoring of compliance with the rules by reading the transaction data on the blockchain.
With this, the European Union’s regulatory body hopes to benefit from the transparency of blockchain technology.
In the way the European Commission envisions, market participants will not have to actively collect and verify data for regulators. So this is a solution that also benefits the industry. The question is, of course, to what extent the European Commission has this in mind and whether it is a feasible plan.
European legislators see big risks with DeFi
Despite the European Commission indicating that they see the innovation within DeFi as an opportunity, they also acknowledge the many risks it brings. In particular, the quasi-anonymous nature of DeFi means that it is difficult to monitor everything and everyone. The thing is, in theory, malicious people have a lot of space to scam people. Certainly in this context, it is interesting that the European Commission is looking for an automated solution.
Furthermore, the European Commission is concerned about the rapid growth of the DeFi ecosystem. Particularly because stablecoins play a prominent role in it. A fear we saw come true just this week with the fall of UST stablecoin and the Terra protocol. This is not only bad news for investors, but also the reputation of the industry. Outsiders often cannot distinguish between projects and lump everything together.
8/ Plus, I wasn’t aware that the Commission announced “a pilot project on the technical foundations of DeFi
supervision embedded in blockchain in 2022.”
This could be a globally unique pilot program where the EU tests an active, “embedded” form of supervision and monitoring.
— Patrick Hansen (@paddi_hansen) May 2, 2022
Even bitcoin, with a price of 29,000 per BTC, is struggling with the fall of the Terra ecosystem. The European Commission further indicates that it does not want to stifle innovation with overly heavy regulation. That is at least a hopeful statement for the DeFi world, although with politics it always remains to be seen how the rules will eventually come out of the proverbial box.