EU Regulators Eye DeFi Lending Vaults in MiCA Overhaul

The European Commission has opened a consultation on regulating lending vaults in DeFi (Decentralized Finance) as part of its Markets in Crypto Assets (MiCA) framework. The current rules exclude crypto asset services provided in a 'fully decentralized manner,' but the commission is considering whether to bring lending into the regulatory perimeter.

Morpho, a decentralized lending protocol, has an architecture that divides responsibilities between multiple participants. This makes it difficult to identify who should be regulated under MiCA, as none of these participants can be considered a single provider of a regulated lending service.

Jonathan Galea, a partner at Cahill Gordon & Reindel, argues that policymakers should be careful not to treat all lending vaults as a single category. He suggests that structures with different economic functions and control mechanisms should be treated differently, as bringing 'DeFi lending' into the perimeter could capture structures with opposite answers.

The commission's consultation closes on September 30, and what follows will determine whether lending vaults remain outside MiCA or become subject to a new regulatory framework. Brussels faces the challenge of writing rules that distinguish between different forms of onchain lending and those who actually exercise control over them.