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German Regulator Calls for New DeFi Laws

BaFin's Birgit Rodolphe cites the potential for fraud and investor losses.

Updated May 11, 2023, 5:06 p.m. Published May 16, 2022, 3:21 p.m.

Skyscrapers in Frankfurt, Germany (lupengyu/Getty Images)

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.

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“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.

UPDATE (May 16, 2022, 16:50 UTC): Adds last two paragraphs including comment from Astra.

Regulations Germany BaFin Decentralized Finance DeFi

Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He previously wrote about financial regulation for news site MLex, before which he was a speechwriter and policy analyst at the European Commission and the U.K. Treasury. He doesn’t own any crypto.

Jesse Hamilton

Jesse Hamilton is CoinDesk's deputy managing editor on the Global Policy and Regulation team, based in Washington, D.C. Before joining CoinDesk in 2022, he worked for more than a decade covering Wall Street regulation at Bloomberg News and Businessweek, writing about the early whisperings among federal agencies trying to decide what to do about crypto. He’s won several national honors in his reporting career, including from his time as a war correspondent in Iraq and as a police reporter for newspapers. Jesse is a graduate of Western Washington University, where he studied journalism and history. He has no crypto holdings.