Sounds like utopia – someone needing a loan at short notice and finding one on the internet within seconds. Not from a direct bank, not from a FinTech – but from a pseudonymous collective of thousands of people from all over the world.

Decentralised finance, or DeFi, is the magic formula here. What started with crypto assets such as bitcoin or ether has now evolved into an entire ecosystem. Based on distributed ledger technology, pseudonymous users operate exchange or trading platforms for crypto assets. For a fee these users can lend or borrow crypto assets, take out insurance, acquire derivative products or have their crypto assets managed. Conventional financial market offerings coupled with an innovative technology that is difficult for many to understand – self-governing, decentral, outside the traditional financial system.

Utopia? Or rather dystopia? Who can I turn to if I need more time to repay my crypto loan? What happens if my crypto assets suddenly vanish altogether? A deposit protection scheme simply does not exist for such cases. Experience also shows that the DeFi technology is not quite as democratic and altruistic as crypto fans would have us believe. Technical problems, hacks and dubious activity abound. Losses that have cost hundreds of millions are not uncommon.

For all the excitement over the technical innovations that make DeFi possible, one thing is clear: a business model based on new technologies does not have regulatory carte blanche. Anyone providing services requiring authorisation in a certain country is subject to that country’s supervisory legislation.

The DeFi market is still a niche market, but were it to enter into serious competition with the traditional financial market, specific new regulations would be needed.

Make no mistake – the clock is ticking. The longer the DeFi market remains unsupervised, the more risk this poses to consumers. And the greater the danger that critical offerings that have systemic relevance will establish themselves. For this reason, we need to actively define a regulatory framework for new offerings and thereby give providers of innovative products and services legal clarity. The introduction of the crypto custody business shows that innovative regulation can even serve as an example of attractive regulation. Ideally such provisions would of course be consistent throughout the EU in order to prevent a fragmented market and boost Europe’s collective innovation potential.

At the same time, however, any regulatory considerations must not lead to a relaxation of standards already in place or make DeFi offerings more attractive than comparable products and services on the traditional financial market.