Decentralized finance (DeFi) must be subject to new regulations, a senior German financial regulator said, citing the risk of hacks and fraud.
The comments come at a time when EU regulators are considering whether the crypto law known as MiCA should cover other Web 3 innovations in the financial sector beyond currencies such as Bitcoin.
"If DeFi is to be a real competitor for traditional financial markets, it won't work without specific new regulations," said Birgit Rodolphe, executive director for settlement and money laundering prevention at German financial regulator BaFin.
"Experience shows that DeFi is not quite as grassroots and altruistic as fans of the field make it out to be," she said, referring to the numerous technical problems, hacks and dubious activities that have cost hundreds of millions.
"Ideally, of course, such regulations would be uniform across the EU to prevent a fragmented market and strengthen Europe's collective innovation potential," she added, referring to DeFi applications such as insurance, credit and securities.
Germany recently topped a CoinCub survey of the world's most crypto-friendly countries, in part due to its favorable tax treatment of cryptocurrencies.
The European Commission originally proposed the Markets in Crypto Assets (MiCA) regulation to ensure stablecoins don't rip off investors or destabilize the economy, but lawmakers and governments are now arguing over whether it should cover innovations like DeFi and non-fungible tokens (NFTs).
To the relief of some in the industry, lawmakers and governments appear to be refraining from imposing new DeFi regulations for now, instead tasking the commission to conduct another study in a year or two.