German BaFin official argues for EU-wide DeFi rule that is innovative

  • Germany has taken a number of crypto-related measures across government, including legal amendments to embrace blockchain and stricter regulations on crypto businesses.
  • BaFin is Germany’s financial regulator, responsible for overseeing banks, insurance companies, and other financial organizations, including cryptocurrency startups. BaFin is in charge of issuing crypto custody licenses, which are essential for companies wishing to provide bitcoin services in Germany.
  • Lending, borrowing, insurance and other assets outside the traditional financial system are all subject to licensing and supervision in the states where they are sold, and she urged authorities to establish standards that will give DeFi providers legal certainty.

Birgit Rodolphe believes such frameworks should be the same across the EU to avoid a fragmented market, citing the German crypto license as an example of attractive legislation. The executive director of the German Federal Financial Supervisory Authority (BaFin), Birgit Rodolphe, called for innovative and uniform regulation of the field of decentralized finance (DeFi).

An Attractive Regulatory Framework for Crypto Businesses

BaFin is Germany’s financial regulator, responsible for overseeing banks, insurance companies, and other financial organizations, including cryptocurrency startups. BaFin is in charge of issuing crypto custody licenses, which are essential for companies wishing to provide bitcoin services in Germany. Rodolphe warned of the dangers of the uncontrolled DeFi zone for consumers in an article on the BaFin website, calling for comparable regulatory considerations in all EU member countries:

One thing is certain: time is running out. The longer the DeFi market remains unregulated, the greater the risk to clients and the greater the possibility that key systemically important offerings could emerge. She listed technical difficulties, hackers and fraudulent behavior as threats to consumers, saying DeFi is not as democratic and altruistic as its proponents claim. DeFi devices are difficult for many to grasp. She came to the conclusion that DeFi protocols cannot operate outside the rules simply because they use new technologies:

Utopia? Or is it a dystopia? If I want to defer my crypto loan, who do I contact? What if all my crypto holdings disappear overnight? In any case, there is no deposit insurance for such situations. She went on to say that loans, borrowings, insurance and other assets outside the traditional financial system are all subject to licensing and supervision in the states where they are sold, and she urged authorities to establish standards that will give DeFi providers legal certainty.

Rodolphe cited BaFin’s Crypto Custody Business License, which launched in January 2020, as an attractive regulatory framework for crypto businesses. The license allows companies to provide cryptocurrency services in Germany. Only four providers have been licensed so far, but many financial institutions have applied. Rodolphe wrote that the regulatory systems of different European countries should be the same:

Zero Tax Policy on Long Term Crypto Capital Gains

Ideally, these rules would be uniform across the EU to avoid market fragmentation and maximize Europe’s total innovation potential. In Q1 2022, Germany overtook the United States as the most crypto-friendly country due to its zero-tax policy on long-term crypto capital gains. According to a study published in March 2022, almost half of Germans are interested in investing in cryptocurrency.

In 2021, Germany took a number of crypto-related measures across government, including legal amendments to embrace blockchain and stricter regulations on crypto businesses. The country’s central bank has been a pioneer in the development of a European Central Bank Digital Currency (CBDC). Rodolphe came to the conclusion that new DeFi laws need to be weaker than existing standards for traditional financial products, as this could make DeFi products more attractive to businesses from a regulatory perspective.

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