Inoming rules for decentralized finance protocols in Europe could raise significant barriers to crypto-native projects while encouraging licensed traditional financial institutions to get on board, predicts Marina Markezic, executive director of the European Crypto Initiative.

During an interview with Cointelegraph, Markezic discussed the European Commission’s upcoming DeFi report, which is due Dec. 30, 2024. The report is under the markets in Crypto-Assets (MiCA) framework and will examine the feasibility of specific regulations for the DeFi ecosystem.

“We think that this regulation will facilitate those [traditional] players to come into this crypto space. We know that some banks are already thinking of issuing stablecoins,” Markezic said in response to the expected impacts of a DeFi regulatory framework, adding that:

“Whatever we have seen over the years being developed [...] now it’s coming from this institutional point of view, and definitely will be harder for all the crypto native projects to get licensed and be compliant.”

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The EU's report aims to examine how decentralized systems should be regulated, particularly those without a clear issuer or service provider, such as decentralized exchanges. As a major outcome of the report, it may provide initial definitions of what constitutes decentralization in the eyes of regulators.

“We argue that the situation is very much not that type of a black and white scenario, but rather DeFi presented as a spectrum,” Markezic contends.

This ‘DeFi spectrum’ would encompass a variety of different use cases, ranging from fully decentralized systems, where there is no control or human intervention and operate independently, to systems that exhibit various degrees of control and management.

Rather than laying out strict rules for the sector, legal experts are advocating for clear standards. “I think it is critical for governments, policymakers, and the industry to first align and agree on what really constitutes DeFi,” Sascha Drobnjak, former head of legal and compliance at the Elusiv protocol, told Cointelegraph.

Drobnjak explained that transforming proposed measures into enforceable regulations poses additional challenges. “How and to whom can a regulator impose supervisory measures without a tangible actor in the system? What does it even mean to be tangible?” He continued:

“The more a regulation is based on certain standards and principles rather than rigid rules, the easier it is to apply to future technological innovations.”

DeFi describes financial services that operate on public blockchains, primarily on the Ethereum network. Essentially, it recreates services offered by banks and financial institutions (like lending, borrowing, trading or insurance) but operates without having those institutions as intermediaries.

The DeFi market is expected to expand in Europe in the coming years. Statista predicts the DeFi sector will generate approximately $6.69 billion in revenue in 2024, with a compound annual growth rate of 9.67% between 2024 and 2028, reaching $9.68 billion in revenue in 2028.

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