German BaFin official calls for “innovative” EU-wide DeFi regulation

Birgit Rodolphe, Managing Director of the Federal Financial Supervisory Authority (BaFin), has called for innovative and uniform regulation of the decentralized financial area (DeFi) throughout the European Union (EU).

BaFin is Germany’s financial regulator responsible for regulating banks, insurance companies and financial institutions including cryptocurrency companies. BaFin is the issuer of “Crypto Custody Licenses”, a permit required for companies wishing to offer cryptocurrency services in Germany.

In an article on the BaFin website, Rodolphe warned of the risks for consumers from the unregulated DeFi space and called for uniform regulatory considerations in all EU member countries.

“One thing is clear: the clock is ticking. The longer the DeFi market remains unregulated, the greater the risk for consumers and the greater the danger that critical offers with systemic importance will establish themselves.”

Noting the risks to consumers from “technical issues, hacks, and fraudulent activities” that have lost millions, she claimed that DeFi is not as “democratic and altruistic” as its fans say and that DeFi products are “for many are difficult to understand.” She concluded that DeFi protocols are not free to operate outside of regulations just because they use new technologies.

“Utopia? Or rather dystopia? Who do I contact if I want to cancel my crypto loan? What happens if my crypto assets suddenly disappear completely? There is no deposit protection fund for such cases.”

She added that credit, lending, insurance and other products outside of the traditional financial system are subject to licensing and regulation where they are offered, and urged regulators to establish rules that bring legal clarity to DeFi providers.

Rodolphe highlighted BaFin’s “crypto custody business” license, introduced in January 2020, as a regulatory regime “attractive” to crypto companies.

The license allows companies to offer crypto services in Germany. Only four providers are currently approved, but many financial institutions have applied. Rodolphe wrote that the regulatory framework should be the same in different European countries:

“Ideally, such requirements would of course be uniform across the EU in order to prevent market fragmentation and leverage Europe’s entire innovation potential.”

Related: European watchdog lists crypto as an AML threat alongside lawyers and accountants

Germany rose to the top spot as the most “crypto-friendly” country in the first quarter of 2022, in part due to its zero-tax policy on long-term crypto capital gains. A March 2022 report found that almost half of Germans are interested in investing in crypto.

Germany, too, has taken many crypto-related steps across its government in 2021 with legislative reforms to adopt blockchain and tightening regulations for crypto companies. The country’s central bank took a leading role in testing a European Central Bank digital currency.

Rodolphe concluded that new DeFi regulations must not be weaker than the standards already in place for traditional financial products, as they could make DeFi products more attractive to businesses from a regulatory perspective.