Europe moves to regulate DeFi – ESMA defines what ‘genuinely decentralized’ means
Tokenized securities are expected to grow 79x to $349B in the next four years.
The European financial watchdog, the European Securities and Markets Authority (ESMA), has called for DeFi and tokenized securities regulation. Additionally, the regulator sought more supervisory powers to track and enforce anti-money laundering (AML) laws in the sector.
Some of ESMA’s proposals were slightly similar to those of the European Banking Authority (EBA), further underscoring the EU regulators’ push for an expanded crypto regulatory regime by 2027.
ESMA pushes for DeFi regulation
On DeFi interfaces, both ESMA and EBA were aligned. In the policy review call, ESMA stated,
As crypto markets evolve and activity around decentralised finance (DeFi) and stablecoins grow, ESMA advocates for the introduction of clearer criteria for determining which activities can be considered genuinely decentralised.
In particular, ESMA wants firms intermediating DeFi access to have a dedicated framework that governs them.
It also recommends creating a new regulated crypto asset service for firms that provide users with access to DeFi protocols.
EBA made a similar call, warning that DeFi platforms are being used to hunt for stablecoin yield, including some unlicensed stablecoins. To mitigate this regulatory arbitrage loophole, the EBA also called for DeFi interface regulation.
Additionally, it wants lenient stablecoin bank reserves and a new cyber-based certification framework for DeFi venues to let users know the platform’s resilience to hacks.
Besides, ESMA pressed for a new crypto-asset classification.
On fraud, investor protection, and enforcing AML laws, ESMA asked for more supervisory powers. These include powers to deactivate fraudulent websites and freeze crypto funds flagged for violating AML laws.
The EU follows the U.S.’s tokenized securities push
Finally, the watchdog reinforced the need to harmonize rules for the region’s tokenized capital markets.
ESMA highlights the need for a framework for tokenised securities and on-chain settlement that can support the development of an integrated European tokenised capital market and facilitate cross-border activity in the future.
Already, the U.S. SEC is aggressively pushing for its tokenized securities via an “Innovation Exemption” in a bid to export its capital markets, the way it did with stablecoins.
In fact, tokenized securities have hit $4.4B and 1% of stablecoin supply. The growth is expected to explode, according to Chris Burniske, former Ark Invest crypto lead.
What happened to stablecoins will happen to tokenized equities-blockchains are unapologetically superior to TradFi’s rails.
By 2030, the market could grow to $349B or 79x, according to Binance CEO Richard Teng.
As such, the EU’s urgency to have simplified tokenized securities for overseas investors makes sense.
The proposals are part of the ongoing MiCA review, and the feedback may be adopted into an updated framework by mid-2027.
Final Summary
- ESMA wants supervisory powers for crypto AML enforcement and DeFi interfaces regulation.
- The watchdog pressed for tokenized securities rules, as the sector is projected to grow 79x to $349B.
