EU signals regulatory intent with study on ’embedded supervision’ of Ethereum DeFi

Circle Policy Advisor Patrick Hansen tweeted details of a tender by the E.U. Commission to develop “embedded supervision” of decentralized finance (DeFi) on the Ethereum network.

“The aim is to study technol. capabilities for automated supervisory monitoring of real-time DeFi activity.“

The value of the tender is estimated to be €250,000 ($242,600), and the study is expected to take 15 months to complete.

The E.U. wants to gather data on Ethereum DeFi

A contract notice on the E.U. website informed details of the study. It called for suitably qualified entities to initiate a pilot project into developing and testing technological solutions for “embedded supervision” of DeFi activity.

The notice acknowledges Ethereum is the most significant settlement platform for DeFi protocols and mentioned targeting “the open nature” of blockchain data.

E.U. bureaucrats seek to advance the real-time automated data gathering of DeFi activity for “supervisory monitoring.”

“Its main focus will be on automated supervisory data gathering directly from the blockchain to test the technological capabilities for supervisory monitoring of real-time DeFi activity.”

Hansen commented that the technology that comes out of this study could be “quite impactful,” as it would make monitoring compliance more effective and reduce the need for other participants to collect, verify, and deliver data to authorities.

DeFi exists in a grey area outside the rest of the cryptocurrency industry in that software protocols, with no single point of contact, cannot comply with existing Know Your Customer (KYC) and Anti-Money Laundering (AML) rules the same way as CeFi platforms.

This presents a problem for global regulators tasked with preventing financial systems from being exploited for money laundering and other forms of financial crime.

However, as demonstrated by the recent “doxing” of Celsius users, closing the net on financial criminals is at the expense of the personal privacy of legitimate users.

E.U. approves crypto regulation bill

On October 5, the E.U. approved the Markets in Crypto Assets (MiCA) bill, which, if passed into law, would create a comprehensive regulatory framework for digital assets in the region. Members of the European Parliament will vote on passing the bill on October 10.

Interestingly, Section 12a of the bill clarified the treatment of DeFi by stating that “fully decentralized” services fall outside the regulation’s scope.

“Where crypto–asset services as defined in this Regulation are provided in a fully decentralised manner without any intermediary they do not fall within the scope of this Regulation.”

However, technologies for the “embedded supervision” of DeFi suggest the E.U. still intends to monitor and oversee this area.