New EEA handbook to address regulatory ambiguity in DeFi laws

The Enterprise Ethereum Alliance (EEA) has published a comprehensive DeFi Risk Assessment Guidelines handbook that aims to clarify the complexities and regulatory uncertainties around decentralized finance (DeFi).

The main aim of the initiative from the EEA is to encourage innovation in the DeFi space and address concerns over potentially restrictive regulations from global regulators.

The newly published guides delve deep into the intricacies of DeFi operations, offering detailed insights on how to assess, manage, and mitigate various risks. This resource comes at a critical time when the EEA has highlighted a significant gap in consistent accounting standards and regulatory guidance, particularly evident in frameworks such as the EU’s Markets in Crypto Assets regulations.

“There is still a lot of regulatory uncertainty around the ‘boring’ accounting issues, securities regulations, etc., because regulators are still learning about it. [DeFi] “Space,” Charles Nevile, EEA Technical Programs Director, told crypto.news.

These guidelines aim to equip DeFi protocols with the tools to proactively engage with compliance requirements and establish industry-supported best practices for risk assessment. Furthermore, they are designed to help DeFi developers conduct due diligence in an environment where detailed regulatory mandates are rare. Amid increasing pressure from regulators and policymakers threatening anti-crypto legislation and enforcement actions, the EEA’s guidelines cover a comprehensive area.

Topics range from governance and token economics to software issues, liquidity, and compliance with regulatory and external market factors. It also addresses specific challenges in software components such as oracles, smart contracts, and bridges, and focuses on security and interoperability. For practical application, the guides outline best practices for risk management, such as user education, bug bounty programs, stress testing, security updates, and data encryption. A comprehensive glossary of DeFi-related terms is included to help newcomers navigate the complex jargon of the industry.

In addition to assisting developers, the guidelines serve as a reference framework for regulators and licensing authorities, already influencing licensing requirements in the Abu Dhabi Global Market (ADGM) and being incorporated into the EU’s Sandbox program use cases.

Nevile also highlighted the importance of regulatory engagement in DeFi development. “The best way for this to happen is for regulators to engage with industry members in a multi-stakeholder development approach,” he said.

The guidelines have received support from several AEA board members, including crypto industry leaders from Consensys and the Ethereum Foundation, as well as major companies such as JP Morgan, Santander, and Microsoft.

The EEA has stated that its guidelines will apply to both non-crypto firms and regulators. Additionally, these guidelines are crucial for financial institutions assessing investment risks. Dyma Budorin, co-chair of the EEA’s DRAMA working group and CEO of Hacken, emphasized that the guidelines are useful for traditional financial institutions that are wary of entering the DeFi space.

“They don’t know what the DeFi risks are, and that’s why they’re not getting into DeFi,” Dyma Budorin, co-chair of the EEA’s DRAMA working group and CEO of blockchain security firm Hacken, told crypto.news. “DeFi protocols that plan to collaborate with old money can use the DeFi Risk Assessment Guidelines as a best practice reference,” Budorin added.

As large traditional financial firms increasingly embrace DeFi, the importance of the EEA guidelines is underlined. Notably, BlackRock launched its first tokenized fund on Ethereum this year, signaling a significant move into DeFi by a leading global asset manager.

Similarly, financial giants such as JP Morgan, Goldman Sachs, and HSBC are actively exploring DeFi through tokenization and further integrating blockchain technologies into their operations. To cope with these developments, the EEA aims to maintain oversight through its Working Group and ensure that the guidelines evolve in response to new developments and feedback from users. This iterative process aims to refine and improve the guidelines to better serve the industry.

A recent security incident involving the Arcadia Finance protocol on July 16 underscores the critical need for robust DeFi risk assessment and preventative measures. In this breach, hackers targeted a specific contract address and extracted more than $455,000 in various cryptocurrencies, which were then laundered through the Ethereum-based mixing service Tornado Cash. The incident highlighted persistent vulnerabilities in DeFi protocols, reinforcing the importance of comprehensive risk management strategies advocated by the EEA guidelines.