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DeFi Needs Greater Supervision to Protect Investors, Says German Financial Regulator

2 mins
Updated by Geraint Price
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In Brief

  • Birgit Rodolphe published a post on the risks of the DeFi market.
  • She believes in innovation, but says that the niche is all fraught with challenges and issues.
  • Lawmakers in other countries are also turning their attention to DeFi.
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A high-level executive from Germany’s financial regulator has called for greater regulation of decentralized finance to protect investors from market risk.

The Federal Financial Supervisory Authority’s Birgit Rodolphe revealed intentions to supervise the DeFi market in a post, saying that the utopia of DeFi and finance without supervision will need new regulation.

Rodolphe makes reference to borrowing and lending platforms, insurance, and derivative products, among other things. Her concern is that, while DeFi services can offer a more quick and seamless experience for users, it lacks checks that protect investors. 

“Utopia? Or rather dystopia? Who do I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear altogether? In any case, there is no deposit protection fund for such cases. Practice also shows that DeFi is not quite as grassroots democratic and altruistic as the fans of the scene make it out to be. The scene abounds with technical issues, hacks, and fraudulent activity. Damages in the hundreds of millions are not uncommon,” she wrote.

For these reasons – like so many other lawmakers – Rodolphe believes that anyone who provides such services must require a license that is subject to the supervisory law in the region. She also suggests that the EU must work to provide uniform laws across its markets.

In general, Germany seems to be accommodating enough towards crypto. It has not introduced any laws or measures that would adversely affect the market, but its views on DeFi indicate that it may become stricter, at least in the case of the niche.

DeFi’s wild west days may be coming to an end

DeFi has been growing larger on the radar of regulators in recent months. The combination of the vast gains made by investors and the notoriety of incidents such as hacks and stablecoin crashes have led to increased scrutiny.

Consequently, DeFi may no longer be the free space that its users have come to cherish. Lawmakers are targeting stablecoins and lending platforms, but there may be broader restrictions coming as the examination continues. The IMF has also talked about the risks of DeFi and called for regulation.

Exactly how regulators plan to control the DeFi market remains to be seen as it is – by its very nature – not controllable. But some early indications of the signs indicate that centralized providers and companies tangential to the space may be targeted, as well as mandating information on unhosted wallets.

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Rahul Nambiampurath
Rahul Nambiampurath's cryptocurrency journey first began in 2014 when he stumbled upon Satoshi's Bitcoin whitepaper. With a bachelor's degree in Commerce and an MBA in Finance from Sikkim Manipal University, he was among the few that first recognized the sheer untapped potential of decentralized technologies. Since then, he has helped DeFi platforms like Balancer and Sidus Heroes — a web3 metaverse — as well as CEXs like Bitso (Mexico's biggest) and Overbit to reach new heights with his...