IOTA and the European Blockchain Association to shape the future of DeFi in the billion market
- IOTA and other industry players react to the ACPR report on DeFi regulation, highlighting the need for a regulatory framework that considers user control, trustless interactions and governance structures, while combining decentralization and disintermediation.
- IOTA emphasizes the importance of addressing risks and vulnerabilities in DeFi through formal certification and auditing of smart contracts, along with continuous monitoring and regular security audits.
The IOTA Foundation has been a leader in establishing regulatory frameworks and rules in the European blockchain market. They have worked together with the European Blockchain Association, the European Crypto Initiative, as well as the Global Blockchain Business Council (GBBC) to design regulations for Europe’s decentralized financial market (DeFi).
Earlier this year in March, the French Fintech Innovation Hub of the Autorité de Contrôle Prudential et de Résolution (ACPR) published a report entitled “‘Decentralized’ or ‘Disintermediated’ finance: which regulatory response?” seeks an explanation of a Decentralized Finance (DeFi) ecosystem, its challenges, use cases and other limitations.
Furthermore, ACPR also explores concentration and technology risks, oracle-related risks, as well as other regulatory challenges related to the complexity of DeFi products.
What does the ACPR report suggest?
The report from the ACPR suggests different ways to regulate DeFi to address the risks involved. They suggest adapting regulations to the unique characteristics of DeFi and being flexible rather than rigid. They also recommend combining traditional financial regulation with regulations from other economic sectors to create a regulatory framework.
One of the main proposals is to have a certification process for public blockchains based on factors such as the accuracy of the data code, the number of validators and validation concentration limits. This certification will also apply to smart contracts, taking into account the specific services offered and governance.
The ACPR is also considering the idea of banning interaction with uncertified smart contracts. The certification will have a limited duration, can be withdrawn at any time, and will require renewal if there are significant changes to the code. They also suggest the possibility of building certification requirements directly into the code in the future.
Instead of implementing MiCA, which has its own reporting deadline, ACPR has launched a public consultation based on the points highlighted in the report.
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Industry response to ACPR
IOTA and other actors such as the European Blockchain Association, GBCC and many others have given a joint response to the ACPR report touching on various points.
- Different definitions of DeFi: IOTA and the team disagree with the ACPR report’s definition of DeFi, saying it overlooks important elements such as user control, trustless interactions and governance structures. They argue that DeFi combines decentralization and disintermediation, as it distributes control and decision-making while leveraging blockchain and smart contracts.
- DeFi as a democratizing force in the financial industry: IOTA believes that despite being in its early stages, DeFi has the potential to transform the digital economy by facilitating seamless virtual transactions. However, challenges related to centralization, cyber attacks and scalability persist. They argue that new governance models, along with layer 1 and layer 2 solutions, can effectively address these challenges.
- Formal certification as a solution to risks and vulnerabilities: IOTA claims that risk in DeFi primarily stems from Layer 2 solutions and the application layer. Transparency problems, systemic vulnerabilities and risks for private customers are highlighted. Certification and auditing of smart contracts is important, along with proposals for certified and auditing tools. Although formal verification is preferred for security, continuous monitoring, bug rewards, and regular audits are also necessary for ongoing security.
- Regulation of intermediary services: IOTA emphasizes the importance of regulating DeFi intermediaries. They argue against a one-size-fits-all approach and suggest focusing on higher layers of the infrastructure for user protection while preserving decentralization and innovation.
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