BaFin's Birgit Rodolphe cites the potential for fraud and investor losses.
Decentralized finance (DeFi) needs to be subject to new regulations, a senior German financial regulator said, citing the risk of hacks and fraud.
The comments come as European Union regulators consider whether a flagship crypto law known as MiCA (Markets in Crypto Assets) should extend beyond currencies like bitcoin to cover other Web 3 innovations in the financial sector.
“If DeFi is to be a genuine competitor to traditional financial markets, then this won’t work without specific new regulations,” said Birgit Rodolphe, an anti-money laundering official at German financial regulator BaFin.
“Experience shows that DeFi is not quite as grassroots and selfless as fans of the space depict,” she said, citing abundant technical problems, hacks and dubious activity that cost hundreds of millions.
“Ideally such provisions would of course be consistent EU-wide, to prevent a fragmented market and to boost Europe’s collective innovation potential,” she added, noting DeFi applications such as insurance, lending and securities.
Germany recently topped a CoinCub survey of the world’s most crypto-friendly jurisdictions, in part because of its favorable tax treatment for the assets.
The European Commission originally proposed the MiCA rule to regulate stablecoins, but lawmakers and governments are now wrangling over whether crypto rules should cover DeFi and non-fungible tokens (NFTs).
To the relief of some in the sector, lawmakers appear to be moving away from imposing new DeFi regulations for now. Rather, they are asking the Commission to study the issue.
But some in the industry have warned that regulation could generate uncertainty in a nascent industry. Responding to Rodolphe's comments, Sakhib Waseem, Chief Innovation Officer at Switzerland's Astra Protocol, also told CoinDesk it could undermine the whole philosophy of DeFi, as supervisors in the U.S, EU and globally will tend to look for entities that can take responsibility for finance projects.
"Unless we take action to meet with regulators ... to strike the balance, we could see centralization for all customers going forward and rapid action from an enforcement perspective which would stifle the growth of this innovative industry," Waseem said.