French Regulators Explore Regulatory Challenges in Decentralized Finance (DeFi)

In France regulators and institutions are turning their attention to decentralized finance (DeFi) as the sector continues to gain traction . Over the weekend the Governor of the Banque de France expressed the need for a comprehensive regulatory approach and emphasized the importance of same activity, same risk, same regulations . France’s financial markets regulator The Autorité des Marchés Financiers (AMF) also released a discussion paper outlining potential regulatory avenues for the DeFi sector .

Defining DeFi and Considering Permissioned Nature

Determining the reach of DeFi protocols poses a challenge due to their complex nature . The AMF suggests assessing the permissiveness of a blockchain to determine whether an activity falls under DeFi or centralized finance (CeFi) . Factors such as the number of entities or users who can monitor the network activity could be taken into account . The goal is to establish clear criteria for defining DeFi .

Smart Contracts, Autonomy and Intervention

The autonomy and continuous operation of smart contracts present another regulatory dispute . The AMF acknowledges that the interventionist aspects required for supervision may clash with the autonomous nature of smart contracts . The AMF plans to develop mechanisms that enable the interruption of operations to protect users in case of irregularities . However this raises questions about the core principles of DeFi which aim to operate outside of traditional regulatory frameworks .

Addressing Opacity and Lack of Documentation

Obscurity and a lack of documentation within the DeFi sector are concerns for regulators . The AMF proposes the translation of smart contract rules into non-technical language and allow them to be read, reviewed and potentially approved by regulatory bodies . This aims to increase transparency and provide regulators with a clearer understanding of DeFi protocols .

Challenges with Decentralized Autonomous Organizations (DAOs)

Decentralized autonomous organizations (DAOs) pose challenges in assessing control and decision-making authority . The AMF like other regulators struggles to evaluate the level of control participants have within a DAO . The distinction between “de facto” control and “de jure” control is complex especially when ownership and governance token distribution are decentralized . Subjective judgments may come into play stressing the difficulty of regulating DAOs effectively .

Navigating the Regulatory Landscape of DeFi

The AMF’s discussion paper sheds light on the complexities faced by regulatory institutions in defining and regulating DeFi . The inherently decentralized and innovative nature of DeFi presents challenges in establishing clear-cut regulatory frameworks . Striking a balance between protecting investors and promoting innovation will be a crucial issue for regulators in the coming months as they grapple with the unique characteristics of the DeFi sector .

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