DeFi Could Be Forced to Incorporate and Certify, French Central Bank Says

Projects in decentralized finance, or DeFi, could be forced to incorporate or prove that they meet governance and security norms, a report by the French central bank said, as regulators seek to extend planned crypto laws to cover more kinds of blockchain-based structures.

Policymakers are now focusing on financial services that lack an intermediary, basically software programs that allow individuals to borrow and lend without a bank. Last week, the U.S. Treasury Department called for tougher money-laundering controls, warning that DeFi was being used to raise illicit funds for North Korea.

“The regulation of disintermediated finance cannot simply replicate the systems that currently govern traditional finance,” said a consultation paper by the ACPR, the arm of the French central bank that supervises banks and insurers. The consultation period during which the ACPR asks for opinions on a proposal is open until May 19.

As one option, “players exercising effective control over sensitive services could be required to incorporate, becoming subject to supervision,” added the paper, which also “proposes to strengthen the security of smart contracts using a certification mechanism” covering code security and governance.

New rules should also stop intermediaries from selling highly leveraged products to regular retail investors, the report said, noting that DeFi often allows high-risk products to be used that in regular finance would be restricted to seasoned professionals.

The Legal High Committee for Financial Markets of Paris, a group of regulators and lawyers, is weighing the legal status of the decentralized autonomous organizations and is due to report in the fall. That could follow in the footsteps of the Law Commission of England and Wales, which has said innovative finance could shake up centuries-old property norms.

The ACPR said it wanted to “explicitly” extend planned European Union consumer protection rules to cover DeFi. Next week lawmakers in the EU are due to vote on the Markets in Crypto Assets regulation, or MiCA, which will regulate centralized crypto platforms like exchanges and digital-wallet providers.

Read more: U.S. Treasury Warns DeFi Is Used by North Korea, Scammers to Launder Dirty Money