Malta is pushing to clarify the boundaries of DeFi under the EU's Crypto Asset Market Regulation (MiCA). The local Financial Services Authority has released a discussion paper seeking input on governance responsibilities, accountability arrangements, and how "fully decentralized" should be defined.

Focus on the definition of complete decentralization

MiCA currently excludes "services provided in a completely decentralized manner without intermediaries" from its regulatory scope. However, the problem is that the regulations do not clearly define to what extent an agreement or platform qualifies as "completely decentralized."

The Malta Financial Services Authority (MFSA) stated in its document that many DeFi projects, while operating under the guise of decentralization, still retain obvious centralized characteristics, such as administrator keys, centralized governance, control over protocol upgrades, and control over the user interface.

Seeking opinions on whether to determine based on degree

The regulators have suggested that decentralization should be viewed as a continuous range, rather than a binary "yes or no" judgment. The document also inquires whether a standardized framework is necessary to determine whether a particular protocol should be excluded from MiCA regulation.

In addition to its scope of application, the MFSA also focuses on the responsibilities of regulated crypto companies. The document proposes that if licensed institutions plan to integrate DeFi protocols into their services, they should first complete smart contract audits, governance reviews, and risk assessments.

The feedback period ends on July 10th.

This means that regulatory discussions are not only targeting DeFi projects themselves, but also extending to crypto service providers that have business connections with DeFi protocols. If these requirements are ultimately implemented, platforms may need to assume more explicit due diligence obligations before integrating on-chain protocols.

In addition to MiCA, the MFSA also lists the legal structures that DeFi projects may adopt, including decentralized autonomous organizations (DAOs) and isolated unit companies. The document also mentions guardian agents, mechanisms with a degree of automation used to monitor, evaluate, and constrain the behavior of other autonomous systems.