Clifford Chance

ACPR publishes a consultation paper as France leads from the front in the debate on the supervision and regulation of DeFi

21 April 2023

Although Europe is still waiting for the new Markets in Crypto-assets Regulation ("MiCA") to be formally approved by the Council of the EU, focus is already turning to the next big question: should "Decentralised finance" (also referred to as "DeFi") be regulated and supervised, and if so, how?

Decentralised finance or DeFi refers to crypto-asset services that are similar to financial services and are carried out without the intervention of an intermediary. Its growth has been fuelled by the development of public blockchains, smart contracts and decentralised applications (DApps).

The main activity in the DeFi sector is collateralised lending, which allows counterparties to bet on the future upward or downward evolution of the value of crypto-assets, but there are many other use cases including derivatives on traditional financial assets (where a crypto-asset represents the value of a real financial asset held as collateral, the price of which it follows), derivatives on crypto-assets and crowdfunding.

Other, more complex use cases demonstrate the difficulties of establishing how to regulate this space. For example, DeFi can also be used for (a) uncollateralised loans (also known as flash loans) whereby users borrow crypto assets without collateral and repay the loan within the same blockchain transaction, (b) staking/liquid staking (which relates to the mechanism used to validate transactions on proof of stake (PoS) blockchain), (c) token swaps on decentralised exchanges (DEXes) and (d) yield farming, whereby crypto assets are locked in a smart contract and used (or "farmed") by a counterparty in exchange for a given yield.

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