The European Union should actively embrace decentralised finance while putting strong safeguards in place to manage its risks, according to a new analysis by the Bruegel think tank. Rather than treating DeFi as a fringe or purely speculative phenomenon, the paper argues that Europe should integrate it into its financial system in a controlled and transparent way.
Bruegel’s core message is that DeFi represents a genuine technological innovation, not just a regulatory headache. Blockchain-based financial infrastructure can reduce costs, increase competition, and enable new forms of financial services if it operates within a clear public policy framework.
DeFi as infrastructure, not a parallel system
The analysis stresses that DeFi should not be allowed to grow as an unregulated alternative to the financial system. Instead, it should evolve as a regulated infrastructure that complements banks, payment firms, and capital markets.
According to Bruegel, past crypto market failures did not stem from decentralisation itself, but from weak governance, opaque risk, and misleading claims of safety. Those problems, the authors argue, are addressable through regulation rather than prohibition.
The paper warns that ignoring DeFi would leave Europe dependent on foreign platforms, dollar-based stablecoins, and non-EU financial infrastructure. In that scenario, innovation would continue anyway, but outside European oversight.
A role for the digital euro
Bruegel places the digital euro at the centre of a future hybrid monetary system. A central bank digital currency could provide a stable, risk-free settlement asset that interoperates with tokenised deposits, regulated stablecoins, and decentralised financial applications.
This approach would allow private innovation to build on public money, rather than competing against it. The authors argue that such a design would strengthen monetary sovereignty and reduce the risk of widespread reliance on non-euro digital money.
The analysis aligns with the European Central Bank’s view that public money must remain the anchor of the monetary system, even as new technologies reshape payments and finance.
Regulation should target risks, not code
Bruegel argues that regulation should focus on economic functions and risks, rather than on whether a service is decentralised or automated. Activities such as lending, leverage, custody, and payments should face similar rules whether they are delivered by banks, fintechs, or smart contracts.
The paper suggests that the EU’s Markets in Crypto-Assets regulation is an important step, but not sufficient on its own to deal with DeFi. Supervisors will need new tools, including transparency requirements, audits of smart contracts, and clear accountability for governance structures.
Crucially, the authors reject the idea that decentralisation makes regulation impossible. Instead, they argue that Europe should shape standards early, before DeFi scales further.
Strategic implications for Europe
Bruegel frames DeFi policy as a strategic issue rather than a purely technical one. The paper argues that jurisdictions able to combine innovation with credible safeguards will influence how future financial infrastructure develops, while those that hesitate risk relying on rules, platforms, and standards set elsewhere.
For Europe, embracing regulated DeFi alongside the digital euro could support deeper capital markets, more competitive financial services, and greater resilience in a digital economy.
The conclusion is clear: the EU should not fear decentralised finance. It should make it safe, align it with public objectives, and ensure it serves Europe’s economy rather than undermining it.