Report: Europe’s new crypto regulations pose existential questions for DeFi

The European Commission’s newly proposed cryptocurrency regulations pose a specific risk for the decentralized finance industry, according to industry regulatory adviser XReg Consulting.

Adopted by the European Commission on Sept. 24, the proposed Markets in Crypto-Assets, or MiCA, regulations aim to strengthen consumer and investor protection in the crypto industry by laying out a series of obligations on crypto-asset issuers.

The regulations stipulate that crypto-asset issuers must be incorporated as a legal entity in order to operate crypto services in the European Union. This particular requirement, however, could represent a significant challenge for DeFi projects because DeFi tokens’ issuers are “at times unidentifiable,” XReg outlined in an Oct. 5 report. 

"The obligation that crypto-asset issuers must be incorporated in the form of a legal entity could pose significant challenges for DeFi projects where issuance is decentralized and there is no identifiable issuer.”

XReg noted that MiCA may generally promote consumer and investor protection, market integrity, and financial stability. However, the DeFi industry may eventually see “significant and irreconcilable regulatory challenges and possible existential questions, at least in Europe,” XReg wrote.

The report states that it remains to be seen how MiCA will coexist with innovative decentralized projects, which “may prove difficult to subject to regulatory requirements.”

XReg Consulting is not alone in noting concerns over MiCa’s potential negative impact on the DeFi industry.

The International Association for Trusted Blockchain Applications, or INATBA — a consortium of major global crypto companies such as Ripple, ConsenSys and Iota — has also raised concerns. In an official response to MiCA’s publication, INATBA warned that under the proposed regulation, some early-stage markets like DeFi “would likely no longer be accessible to Europe and her citizens.”

While the European Commission has given MiCA its stamp of approval, the proposed regulations must go through additional regulatory review within the European Union, a process that could take over a year.