EU Regulators Weigh In On Lending Vaults and DeFi Regulation

The European Commission is revisiting its Markets in Crypto Assets (MiCA) framework to address gaps left unregulated, particularly in decentralized finance (DeFi) and crypto lending/borrowing. The consultation aims to clarify the treatment of 'lending vaults', on-chain structures that facilitate large-scale asset distribution while avoiding traditional lender hallmarks.

The current regulatory uncertainty surrounding these structures relies heavily on non-binding interpretations, leaving questions about who is responsible and what should be regulated. Experts argue that regulators should avoid categorizing DeFi lending as a single entity, as different vault designs serve distinct economic functions and control dynamics.

Jonathan Galea of Cahill Gordon & Reindel suggests using structural and control-based criteria to determine regulation, rather than relying on decentralization tests. He warns that broad-brush regulation could capture fundamentally different economic activities under the same label.