The French financial market regulator has called for a globally coordinated approach to regulating the decentralized finance (DeFi) sector.
In a new discussion paper, the Autorité des Marchés Financiers (AMF) broke down the DeFi market and listed the risks the sector poses. It also made recommendations on how best to regulate the sector at a time when Europe is inching closer to digital asset regulations with the passing of the MiCA framework.
With DeFi being a nascent sector, “legislation should be thought in a progressive and proportionate manner, taking into account on the one hand the benefits to the innovation displayed by DeFi activities and governance models, while on the other considering the risks they pose to participants,” says the AMF.
The watchdog called for a “same activities, same risks, same regulation” approach to DeFi oversight. This approach advocates for all entities that vie for the same customers to be regulated in a similar manner, regardless of the sector. With DeFi offering some services, such as lending similarly to banks and fintech, this approach would bring the sector under stringent banking regulations.
The paper detailed some of the risks DeFi presents, including price manipulation and front-running. It also listed slippage risk, a lack of liquidity, unregulated market risk, and leverage risk.
Beyond the platform-specific risks, DeFi also poses anti-money laundering, counter-terrorist financing, and know-your-customer risks mainly due to pseudonymity, AMF added.
The watchdog called for a global coordinated regulatory approach towards the sector. This will “ensure a global level‐playing field, which should both aim to protect investors and foster innovation.”
AMF pledged to continue working with private and public stakeholders on a balanced regulatory framework supporting innovation while protecting investors. It welcomed public feedback on the paper, with the deadline set at September 30.
While regulators have stepped up efforts toward regulating digital assets, DeFi has remained largely untouched. In the U.S., the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have revealed they intend to regulate the sector, but neither has made any significant stride.
Watch: Jonathan Galea of Blockchain Advisory discusses DeFi and stablecoins
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