European trade body warns against excluding DeFi from MiCA regulation

The Association for Financial Markets in Europe has urged regulators not to exclude DeFi from its MiCA regulatory framework.

"We believe it is crucial to avoid the potential exclusion of so-called 'decentralised activities; as this could open opportunities for regulatory arbitrage and weaken the application of emerging frameworks," the paper stated.

The EU recently adopted MiCA regulations, but the framework excludes new paradigms like decentralized finance. The AFME warns this exclusion could undermine the effectiveness of new regulatory frameworks.

"This exclusion could create unintended risks to financial stability and potential knock-on impacts. While the current overlap of DeFi and Traditional Finance (TradFi) is not yet significant, this should be actively monitored and managed," the paper outlined.

The AFME views DeFi as a significant innovation within the financial system. "Current DeFi efforts can be seen as outsourced innovation and research and development labs for the formal financial system,” the study stated.

The paper, called 'Decentralised Finance - Principles for building a robust digital economy,' recommends the EU develop a taxonomy to classify DeFi activities and digital assets. "This would aid in the creation of a comprehensive regulatory solution to address DeFi's unique challenges," it added.

The AFME also advocates a risk-based approach to DeFi, calling for a consistent regulatory framework encompassing varying levels of centralization.