This week, Christine Lagarde, the President of the European Central Bank (ECB) made some statements in the European Parliament. She said that there was a need for regulating the crypto industry, along with the activities associated with the world of decentralized finance (DeFi). The ECB’s president also heads the European Systemic Risk Board (ESRB) and said that the legislation that has been proposed has a very narrow definition of crypto assets.
Lagarde stated that future legislation should also cover other activities involving these digital assets, including borrowing, lending, and staking, all of which are part of the decentralized finance (DeFi) ecosystem. She added that these activities were increasing and innovating such unfamiliar and unknown sectors come with dangers that will only put investors at risk. Since there is no regulation, conducting fraudulent activities in this sector is immensely easy.
Crypto market crash
The comments from the ECB president come after the massive turmoil that has shaken the crypto market to its core. Some of the most prominent companies that are part of the DeFi space are facing a lot of problems. Lending company Celsius Network announced last week that it was halting its withdrawal and transfer services and has reportedly hired a financial restructuring attorney. This resulted in inquiries into the company by a number of state regulators in the United States.
Similarly, another crypto lending company named Babel Finance also halted its withdrawals and cited liquidity problems as the reason. Lagarde said that it is essential to continue monitoring the industry in order to identify structural trends and prominent threats that can have an impact on the financial system of the European Union.
She also added that there would be more discussions about crypto assets and the financial instability issues that can occur because of them in the coming week.
Back in September 2020, a regulatory framework called the MiCA Regulation (Markets in Crypto-assets) was proposed and the EU adopted it this year in March. The framework is meant to provide guidelines for managing crypto investments within the EU. Lagarde said that it is likely that the regulation will not be implemented until 2024.
Moreover, she also warned that they would need further regulation if there are changes in market practices relevant to bitcoin during this time. She also added that there was too much time until the regulation comes into effect, considering how quickly the crypto market evolves and changes.
Loopholes in the regulation
Lagarde said that the problem with the MiCA regulation is that it is more focused on intermediaries, such as banks, which means that it does not focus on the decentralization aspect of crypto. The European Parliament needs to come up with rules that would apply to assets that do not have any issuer. She went on to say that crypto assets, as well as the entire decentralized finance (DeFi) ecosystem that does not have a centralized authority, can pose genuine risks to the financial stability of the entire European Union.