The European Union’s Financial Stability Watchdog said that new regulation may be required to cover large crypto conglomerates, smart contracts and that the growing digital asset sector and decentralized financial (DeFi) may pose a risk to the system.

The European Systemic Risk Board, chaired in part by Christine Lagarde of the EU Central Bank, has warned in a report published on Thursday of the risks associated with crypto lending, staking and high leverage in the digital asset markets.

The report stated that under one policy option “DeFi developers would be required to adhere to specific regulations covering smart contract design and creation.” The report suggests mandatory code audits and intellectual property restrictions similar to those in pharmaceuticals. It also proposes rules for “oracles”, which transmit real-world information to automated software.

The MiCA report sets out the governance, licensing, and reserve requirements of players like wallet providers and stablecoin issues, but it does not include areas such as crypto-lending and staking, despite warnings that these areas could pose “significant risk to consumers.”

MiCA requires companies to manage conflict of interest among their business lines, but the ESRB says that there is no requirement to identify or mitigate operational or reputational risk from services such as trading and custody.

The report stated that “taking into account any market developments and the experience gained with the application MiCA, it is important to study the activity of crypto asset conglomerates within the EU.” It cited existing payment laws which allow supervisors to force risky services such as cryptocurrency to be divested to a separate subsidiary.

The report stated that while this year was turbulent for crypto assets and DeFi, no systemic implications were realized. However, “exponential growth” dynamics could lead to future shocks being a threat comparable to the 2008 collapse Lehman Brothers.

The ESRB proposed in March that financial technology companies could be subject to bank-style lending limits, citing the growing popularity of cryptocurrency.

Sandali Handagama is the editor.