Many legal traditions all over the globe recognize the right to privacy. It is protected in the United States by the Fourth Amendment. In the European Union it falls under Article 8 the European Convention for Human Rights. Although definitions may differ from one jurisdiction to another, we all have the right to reasonable privacy in our correspondence, our homes, and our personal information.
Businesses, families, and individuals began generating data in unprecedented numbers. It was difficult to determine if this data fell within existing privacy regulations. In the late 70s, this problem was first recognized and accelerated in the decade that followed. The EU’s Data Protection Directive was created in 1995 to protect certain fundamental rights regarding the processing of personal information.
It is important to remember that the EU directive allows member states to decide how it will be integrated into their national laws. It is not a regulation, but a recommendation that members would be legally required to enforce laws starting at a specific date.
The regulation of privacy in Europe has been a long-standing issue since 1995. It began as a directive and evolved into the General Data Protection Regulation, which was enacted in 2018.
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The GDPR was the standard for privacy law, and it influenced regulations in other countries, including the United States. Anu Bradford called it “The Brussels Effect”, where EU law sets the international regulatory standard. It’s happened in many other fields than data privacy. Online hate speech and environmental law are two examples. The “California Effect” is a similar mechanism. California sets a strict standard which is then widely adopted in the United States.
Now, another industry is poised to follow the well-trodden route — from EU Directive to EU Regulation to Global Regulator Standard.
Tornado Cash is an example of how regulation is essential to decentralized finance (DeFi). It involved a protocol that was designed to hide financial transactions and increase privacy. It is essential to build infrastructure according to regulatory guidelines.
As with data in the 1980s and digital securities, the rise of DeFi and digital securities is inevitable. Regulating digital securities trading will be crucial for supporting innovators, protecting investors and promoting innovation.
Digital securities in the United States fall under a regulatory gray area. Neither the Securities and Exchange Commission nor Commodities Future Trading Commission are willing to take responsibility.
California is currently discussing regulation of digital assets. The Senate will likely push for amendments to California’s Financial Code that include digital assets, called the Digital Financial Asset Law. It would become effective in 2025 if it is passed.
EU regulators, on the other hand, have taken a much quicker approach to DeFi. BaFin, the German regulator, is a great example of how to promote innovation. It also offers a blueprint for DeFi across Europe. The German Banking Act amended in 2020 to make crypto assets equal with traditional securities.
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Regulation is also gaining momentum in Brussels. In the fourth quarter, the EU’s Markets in Crypto-Assets will come into effect. This will start an 18-month transition period. The newly published European Financial Stability and Integration Review 2022 demonstrated a solid understanding of the sector. The report called for a revision of the current regulatory approach that focuses regulation on activity and not an entity.
DeFi is still in its infancy. The EU’s digital securities regulation could follow the same path as GDPR. Brussels issued this year a statement on activity-based regulation. We might eventually see it integrated into the Markets in Financial Institutes Directive. Remember, a directive is a guideline for member states. It could then be adopted as regulation by MiCAR.
Other regulators will soon follow the lead of DeFi regulation, which is a real-world example. Decentralized finance will become the technology layer that ultimately will move the entire financial markets. It is a practice that jurisdictions such as Israel have made a routine of. It is unclear whether the U.S. will be more affected by the “Brussels Effect”, or the “California Effect.”
Philipp Pieper is co-founder of Swarm. It’s a German DeFi platform.
This article is intended for informational purposes only and should not be construed as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.