The Malta Financial Services Authority (MFSA) is seeking input on whether decentralization should be understood as a spectrum rather than a strict binary concept.
The regulator is examining how decentralized finance (DeFi) could be brought within the scope of the European Union’s Markets in Crypto-Assets (MiCA) framework, with a focus on governance structures, accountability, and defining what qualifies as “fully decentralized.”
In a discussion paper published Wednesday, the MFSA noted that while MiCA excludes crypto-asset services operating without intermediaries in a fully decentralized form, many DeFi protocols still include centralized components. These may involve admin keys, concentrated governance control, protocol upgrade authority, and oversight of user interfaces.
The authority is asking whether decentralization should instead be assessed on a continuum and whether standardized criteria should be introduced to determine when a protocol falls outside MiCA’s regulatory perimeter.
It highlighted that DeFi remains an ambiguous area under EU rules due to the lack of a clear threshold for determining when decentralization is sufficient for exemption.
The MFSA also considers whether regulated crypto firms should be required to perform smart contract audits, governance assessments, and risk checks before integrating DeFi protocols.
Beyond MiCA, the paper explores potential legal structures for DeFi projects, including decentralized autonomous organizations (DAOs) and segregated cell companies.
It also discusses “guardian agents,” defined as automated systems that monitor and restrict the behavior of autonomous protocols to ensure compliance with predefined risk and operational parameters.
The consultation is open for public feedback until July 10.
