The Financial Markets Authority (AMF) said the “same activity, same risk, same regulation” approach should “clearly” be applied when regulating DeFi.

French Market Regulator Expresses Opinion on Decentralized Finance (DeFi) Regulation in Discussion paper Published June 19th.

However, the watchdog emphasized that DeFi poses more risks than the traditional financial sector. Therefore, the use of pseudonyms is common in DeFi transactions, requiring regulators to address risks such as money laundering and terrorist financing, in addition to enforcing Know Your Customer (KYC) procedures.

Additionally, DeFi activities often cross borders, so the AMF called for global cooperation in market regulation. A discussion paper articulating the regulator’s “preliminary thinking” on DeFi regulation states:

“Because of the cross-border nature and scope of DeFi activity, the AMF has made a global move towards regulation to ensure a global level playing field aimed at both protecting investors and fostering innovation. It also helps develop a coordinated approach.”

Earlier this year, the Financial Stability Board said it was already working with global standard-setters to determine a path to regulate DeFi. Additionally, two working groups of the international securities regulator IOSCO are expected to issue recommendations on DeFi regulation by the end of 2023.

The AMF said it supports all these efforts to allow a “balanced regulatory framework” to emerge.

Balancing innovation and customer protection

The AMF, which issues licenses to cryptocurrency companies in the country, said DeFi protocols needed a “clear framework with safeguards.” Recent market debacles like the Terra Luna crash only underscore the uncertainty in the sector, regulators said.

According to the AMF, DeFi “should be considered for legislation in a progressive and proportional manner.” In other words, the law must weigh the potential benefits of DeFi against the risks it poses to users.

The regulator added that the next few years will be a crucial and dual challenge for the DeFi sector. On the one hand, the sector must find transparent and safe means of growth that foster innovation. On the other hand, the space should offer an “appropriate level of investor protection,” the AMF said.

Post-French regulators call for global alignment on “same risks, same regulations” policy for DeFi.

By Jules

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