EU Considers Regulating DeFi Lending Under MiCA

The European Commission has launched a consultation on potential changes to the Markets in Crypto Assets (MiCA) framework, which could bring decentralized finance (DeFi) lending and borrowing under regulatory scrutiny.

MiCA currently excludes crypto asset services provided in a fully decentralized manner, but Brussels is considering whether to broaden the definition of regulated crypto asset services to include DeFi lending. This would require identifying the relevant 'provider' of these services, which could be difficult due to the complex structures used by DeFi protocols.

Morpho's Vault V2 architecture is an example of this complexity, dividing responsibilities between an owner, curator, allocator, and sentinel in a way that doesn't neatly map onto existing regulatory models. Experts warn that regulators must approach this issue carefully to avoid capturing different types of onchain lending under the same label.

Jonathan Galea, a partner at Cahill Gordon & Reindel, argues that policymakers should be cautious about treating lending vaults as a single category, noting that they help direct fragmented liquidity into lending markets. He suggests that regulation should focus on the structure of the vault and control over it rather than decentralization.

The consultation closes on September 30, and Brussels must balance the need for regulatory clarity with the complexity of DeFi protocols.