Coming DeFi laws in Europe may ban decentralized protocols.

As the European Commission reviews the position, European decentralized financial protocols may soon be subject to new regulations.

According to the Markets in Crypto-Assets (MiCA) – the regulatory framework that regulates digital assets in the region – the European Commission is required to prepare a report by December 30, 2024, evaluating the implementation of the decentralized financial market and certain regulations. For the sector.

“In preparation for this report, we have initiated a number of steps. For example, we are conducting a study on embedded control. No policy decisions have been taken yet,” a Commission spokesperson told Cointelegraph.

The report is tasked with examining how decentralized systems should be regulated, particularly those without a transparent provider or service provider. “A significant aspect of this review is the examination of crypto-asset lending and lending, a key activity in the DeFi space,” said CoinChange Financial CEO Maxime Galash.

DeFi represents a transition from traditional, centralized financial systems to peer-to-peer finance enabled by decentralized technologies built on blockchain. While traditional financial systems rely on controlling central parties such as banks or financial service providers, decentralized systems operate without such an intermediary.

A potential new regulation has raised concerns about the legal viability of some crypto projects. MakerDAO co-founder Rune Christensen pointed out that the rules would put some DeFi interfaces, such as decentralized exchanges, under licensing requirements.

“This makes DeFi frontends impossible on regular internet domains as we know them today. They can only be fully decentralized, local, downloaded frontends or full-KYC online frontends. Shame,” wrote X (formerly Twitter).

Similarly, XReg Consulting Partner Nathan Catania believes that eventually DeFi regulation will apply to all decentralized applications, including DeFi frontends. According to Catania, the MiCA regulation does not define what constitutes decentralization, and the scope of DeFi regulations depends heavily on the criteria used to define the concept.

Even sufficiently decentralized protocols can be seen to provide CASP services such as crypto-assets to other crypto-assets. There are also services for front-ends such as receiving and forwarding on behalf of third parties. So it may come down to how strict regulators want to be when enforcing this.

Under MiCA regulations, a Crypto-Asset Service Provider (CASP) is any entity that provides services related to digital assets to third parties, including, for example, exchange services, transfer services and custodial wallets.

According to Catania, one of the key things regulators can consider when assessing the level of decentralization is whether professional services are being provided.

“A front-end that simply provides an interface for users to access DeFi without any control over users' funds and doesn't charge fees is less likely to be exposed to overhead and even front-end risk that increases fees. Then you need to consider the legal and technical details to determine whether that activity should be licensed under MiCA.”

Another possible avenue for DeFi regulation could be through the Financial Action Task Force (FATF).

Like Coinchange's Galash, the FATF has proposed that individuals or entities that exercise control over certain conditions and have significant influence over DeFi events could be classified as Virtual Asset Service Providers (VASPs). “This classification highlights the complexity of defining and regulating DeFi activities, even though the arrangements appear to be decentralized,” Galash wrote.

According to data from Defilama, the total value (TVL) in DeFi protocols has increased significantly over the past four years, rising from $570 million in April 2020 to $96.7 billion, representing a 16,865% growth over the period. .

“The key question is whether the DeFi arrangement is simply a technological arrangement, or whether there is a regulatory element behind it that could affect consumer prices,” Catania said.

Additional reporting by Helen Partz

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