Excluding DeFi from MiCA could cause ‘unintended risks’ to financial stability: AFME

Europe’s markets association believes a regulatory framework must be imposed on DeFi to maintain stability in the traditional markets structures

article-image

jarrow153/Shutterstock modified by Blockworks

share

The Association for Financial Markets in Europe (AFME) wants DeFi included in MiCA.

MiCA, or Markets in Crypto Assets, a law that aims to regulate digital assets, was passed by the EU Parliament back in April. 

As the name suggests, AFME primarily monitors the financial markets in Europe, and represents both global and regional banks in the EU. 

AFME looked at different elements of DeFi, from smart contracts to DAOs, to suggest areas where regulatory gaps could be filled. 

Read more: UK Considers ‘Crypto Tsar’ to Head Up Regulation

“We believe that [decentralized] finance (DeFi) and its associated activities must be brought within the regulatory perimeter in an appropriate way to manage risks to market integrity, financial stability, and end users, while still promoting financial and technological innovation,” AFME wrote

Specifically, AFME wants to provide DAOs with legal status, though it notes that some in DeFi may “evade any form of centralization to the largest extent possible and regulatory intervention and may need to rely on a self-governing model.” But further consideration would be needed in that case to flesh out how a DAO interacts with the regulated financial services industry.

Even if DAOs don’t get a legal status, then they still need to be monitored — though AFME believes there could be a case built for self-regulation depending on the DAO and its activities.

Among its suggestions, AFME pushes for standards on algorithmic trading rules, potential audits, and disclosures from protocols or protocol teams on both the distribution of governance tokens and influential powers held by the team and investors.

“Despite DeFi having varying levels of centralisation it is important for regulators to have oversight of the governance processes for financial activities being conducted. Existing governance regulations could be leveraged,” AFME wrote.

AFME also wants to ensure that certain aspects of DeFi that interact with the traditional financial system are regulated and monitored due to the potential impacts newer technology could have on the existing structure.

“DeFi efforts can build and test new primitives (e.g., borrowing, lending, trading, and investing using different token formats, smart contracts, and encryption approaches) on these common standards,” AFME said. 

“While the initial focus has been on DeFi payments, as that has the current highest-level activity, we believe the impact on the real economy will be driven through the impact of these new DeFi-like approaches on the processes of borrowing, lending, investing, market making and transferring tokenized assets with the potential for a decrease in counterparty and settlement risk.”

AFME isn’t the first to bring up potential holes in digital asset regulation that MiCA doesn’t touch upon in its current form. Back in June, a study commissioned by the European Parliament also pointed out that DeFi protocols and their nuances were not considered in the current framework.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

Brooklyn, NY

TUES - THURS, JUNE 24 - 26, 2025

Permissionless IV serves as the definitive gathering for crypto’s technical founders, developers, and builders to come together and create the future.If you’re ready to shape the future of crypto, Permissionless IV is where it happens.

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research Report Templates.jpg

Research

The L2 ecosystem has evolved into a complex landscape, with over $17B in market value and $50B in secured assets. While traditionally seen as high-beta plays on Ethereum, no L2 token achieved a beta higher than 1.0 relative to ETH in 2024. Furthermore, token dilution significantly impacted the sector, with a 1% increase in circulating supply corresponding to a 1.4% decrease in returns.

Key figures including Vitalik Buterin struggle to communicate the network’s core mission in an era of memecoin-minimized attention spans

article-image

World Liberty Financial has been busy buying crypto ahead of its launch

article-image

Trump’s token is setting the “tone” for crypto, Empire co-host Santiago Santos said

article-image

A pair of fundraises by Tapestry and Oh both came with expansive ideas about the future of AI and the role of humans in it

article-image

The Calamos Bitcoin Structured Alt Protection ETF — January is set to offer “systematic risk management” across its roughly one-year outcome period

article-image

Crypto industry elites (and a journalist or two) donned black tie at the Crypto Ball Friday night