New EU Regulations Challenge DeFi Protocols with MiCA Compliance
According to MakerDAO co-founder Rune Christensen, “Only fully decentralized, local, downloaded frontends or full-KYC online frontends would be possible.” This regulation leaves DeFi protocols with two primary options: either adopt a somewhat centralized “hybrid finance” (HyFi) model to comply with EU regulations or transition to complete decentralization.
Despite the challenges, fully decentralized protocols are exempt from MiCA's requirements. As outlined in Recital 22 of the regulation, "Where crypto-asset services are provided in a fully decentralized manner without any intermediary, they should not fall within the scope of this Regulation.” This exemption encourages DeFi protocols to eliminate centralized intermediaries to avoid regulatory burdens.
Legal experts like Oliver Völkel highlight that smart contracts used in decentralized services do not constitute intermediaries under MiCA. This distinction allows DeFi protocols to maintain true decentralization to avoid the need for regulatory compliance.
The impending regulations could potentially split the DeFi sector. Nathan Catania from XReg Consulting notes, “Regulation represents a fork in the road for many DeFi projects. They will either embrace decentralization and move further outside the regulatory perimeter or accept some regulation and move toward more of a hybrid finance state.”
DeFi platforms must assess their operational models to ensure compliance or embrace full decentralization. As the regulatory landscape shifts, the DeFi industry must adapt to either align with institutional requirements or reinforce its decentralized roots.
