Malta Opens DeFi Review, Says Few Projects Are Fully Decentralized

Malta’s Financial Services Authority has started work on a regulatory framework for decentralized finance, including decentralized autonomous organizations, or DAOs.

Cointelegraph reported on June 18 that the MFSA published a discussion paper on June 12 setting out its approach to DeFi regulation under the European Union’s Markets in Crypto-Assets framework, or MiCA, and began soliciting industry feedback. Comments are due by July 10.

The MFSA proposed classifying DAOs and similar entities under a new category called “software-based organizations,” rather than treating them as a separate legal concept. The category would include DAOs and other DeFi organizations run through software.

The regulator said the legal framework for the organization itself should be separated from the framework for protocols and software. It said that would help clarify accountability and the scope of regulation for DAOs within existing legal systems.

The MFSA said MiCA excludes fully decentralized models from its regulatory perimeter, but added that many DeFi projects still retain centralized features. In many cases, project operations, governance and decision-making authority remain concentrated in specific entities.

European regulators have also been scrutinizing how decentralized DeFi projects actually are. The European Central Bank said in March that governance power at major DeFi protocols was concentrated among a small number of participants, and concluded that many projects may not meet the standard for full decentralization.

The European Commission began a review of the MiCA framework last month. The review covers the direction of DeFi regulation, whether to allow interest payments on stablecoins and whether additional legislation is needed.

Some officials, however, argue that further DeFi regulation is unnecessary. Peter Kerstens, an adviser to the European Commission, recently said integrating tokenization into the existing digital-asset regulatory framework should take priority over creating a new MiCA 2.