MiCA is coming for DeFi vaults, but regulation will be difficult
Brussels is reviewing whether crypto lending should fall under MiCA, but DeFi lending vaults are making it harder to determine who, exactly, should be regulated.
The European Union is deliberating whether crypto lending should be regulated under the Markets in Crypto Assets (MiCA) framework, but DeFi lending vaults are complicating efforts to determine who should be subject to regulation. MiCA did not originally include crypto lending, but Brussels is now considering expanding its scope to cover decentralized finance (DeFi) and crypto lending.
One contentious issue is the legal status of lending vaults, which can funnel billions of dollars into onchain credit markets without resembling traditional lending. These vaults' legal status remains unclear, as EU law has no specific category for them. Instead, lawyers define them by function rather than label. If Brussels decides to include lending under MiCA, it will present challenges for DeFi and those behind the vaults.
Decentralized lending protocol Morpho's Vault V2 architecture divides responsibilities among an owner, curator, allocator, and sentinel, making it difficult to identify a regulated lending service provider. This lack of clarity could lead to a broad, one-size-fits-all regulation that captures diverse DeFi structures with varying economic functions, potentially disadvantaging newer protocols.
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