Malta Proposes DeFi Rulebook Under MiCA Framework

Key facts

• Malta's MFSA is proposing a legal framework for DeFi and DAOs under the EU's MiCA regulation.
• The proposed framework would recognize DAOs as 'software-based organizations'.
• The MFSA argues many DeFi projects are not fully decentralized and thus may fall under MiCA.
• ESMA is reviewing Malta's crypto licensing process due to concerns over risk assessment.
• ESMA is pushing for uniform and robust scrutiny of Crypto Asset Service Providers across the EU.

Malta's financial regulator, the MFSA, has issued a discussion paper proposing a legal framework for decentralized finance (DeFi) and decentralized autonomous organizations (DAOs) as part of the EU's broader effort to regulate crypto assets under the Markets in Crypto-Assets (MiCA) framework. The MFSA is seeking industry feedback by July 10 on recognizing DAOs as 'software-based organizations,' distinct from the underlying protocol, arguing that many DeFi projects retain centralized features that complicate claims of full decentralization and thus may fall under MiCA's scope.

This initiative comes amid increased scrutiny of DeFi by EU regulators. A European Central Bank paper previously highlighted concentrated governance in major DeFi protocols, suggesting many might not qualify as fully decentralized under MiCA. The European Commission has also launched a review of MiCA, seeking input on DeFi and potential regulatory gaps. However, some, like European Commission adviser Peter Kerstens, suggest focusing on tokenization rather than a separate DeFi rulebook.

Separately, the European Securities and Markets Authority (ESMA) has initiated a formal review into Malta's crypto firm authorization process under MiCA. This review stems from concerns that the MFSA approved a crypto firm despite unresolved risks in governance, IT, and business models. ESMA is urging all national competent authorities across the EU to adopt more rigorous and uniform scrutiny for Crypto Asset Service Providers, including decentralized products and cross-border operations.