The Autorité de Contrôle Prudentiel et de Résolution (ACPR), a part of the French Central Bank, has concluded its public consultation on the regulation of decentralized finance (DeFi). This consultation sought input from various stakeholders and experts within the cryptocurrency and blockchain space. The findings of the ACPR indicate that the term “disintermediated finance” may be more suitable than “decentralized finance” due to concerns regarding structural centralization patterns within DeFi.
One of the key revelations from the ACPR’s consultation is the perception that DeFi is not as decentralized as its name suggests. The regulator points to what it describes as a “paradoxical high degree of concentration” within the DeFi space. This concentration primarily pertains to the physical infrastructure hosting blockchain nodes, with a central role played by cloud service providers. The ACPR’s concerns center around the potential risks associated with such centralization.
The summary of the public consultation indicates that the “vast majority” of respondents favored the continued deployment of DeFi on public blockchains rather than private or permissioned ones. However, the ACPR acknowledges that even on public blockchains, regular audits are necessary to ensure security and compliance. This preference for public blockchains aligns with the core principles of transparency and open access associated with decentralized finance.
Respondents to the consultation expressed a consensus on the need to regulate intermediaries within the DeFi ecosystem and to certify smart contracts. The importance of such regulation and certification is seen as a means to enhance security, transparency, and trust in the DeFi space. These measures aim to protect the interests of DeFi users and contribute to the overall integrity of the ecosystem.
Regulatory recommendations from ACPR and ESMA on DeFi
The ACPR finds it “advisable” to establish rules for the certification of smart contracts. This move aims to provide a clear framework for developers and users, ensuring that smart contracts function as intended. Additionally, the ACPR suggests defining governance structures that would protect the interests of DeFi customers. Clear and well-defined governance can mitigate potential risks and conflicts within the DeFi ecosystem. The regulator also recommends laying down measures to support the infrastructure of DeFi blockchains, further enhancing their stability and security.
The European Securities and Markets Authority (ESMA) also weighed in on the discussion surrounding DeFi. In a comprehensive 22-page report, ESMA acknowledged the potential benefits of DeFi, such as increased financial inclusion, the development of innovative financial products, and improved speed, security, and cost-efficiency of financial transactions. However, alongside these benefits, ESMA highlighted “significant risks” associated with DeFi.
ESMA’s report recognized that DeFi has the potential to democratize access to financial services, potentially reducing reliance on traditional banking systems. It also acknowledged the innovation DeFi brings to financial products and the improvements in the efficiency of transactions. However, ESMA underscored several risks, including the absence of investor protection mechanisms, vulnerabilities to hacking and fraud, and the potential for market abuse in the absence of appropriate regulatory oversight.
ESMA emphasized the importance of regulatory clarity and coherence in addressing the risks associated with DeFi. The report called for a comprehensive regulatory framework that encompasses all aspects of DeFi, from smart contracts and decentralized applications (dApps) to governance structures and intermediaries. It stressed the need for effective supervision and enforcement to ensure that DeFi operates within the bounds of existing financial regulations.
ESMA also highlighted the necessity for global coordination in regulating DeFi due to its borderless nature. Cross-border cooperation and data sharing among regulators were deemed essential to address the challenges posed by decentralized finance effectively. This approach aims to prevent regulatory arbitrage and create a harmonized global approach to DeFi regulation.