Malta’s financial regulator is exploring a new approach to bring decentralised finance protocols under European Union crypto regulation by treating decentralisation as a spectrum rather than an absolute state.
The Malta Financial Services Authority (MFSA) published a consultation paper asking stakeholders whether DeFi should be assessed on a sliding scale of decentralisation, according to CoinDesk. The move could expand the reach of the Markets in Crypto-Assets Regulation (MiCA), which came into full effect across the EU in December 2024.
MiCA currently exempts fully decentralised services from its licensing and compliance requirements. But the MFSA’s paper suggests many protocols claiming to be decentralised may not meet that standard in practice.
The spectrum approach could redefine regulatory boundaries
The consultation proposes evaluating DeFi protocols across multiple dimensions, including governance structure, smart contract control, token distribution, and revenue flows. Protocols would be assessed on how decentralised they are in practice, not just in theory.
Under this model, a protocol with concentrated token holdings, upgradeable smart contracts controlled by a small team, or centralised front-end infrastructure could be deemed sufficiently centralised to fall under MiCA’s jurisdiction. The regulator would have discretion to determine where on the spectrum a protocol sits.
The MFSA said this approach recognises that decentralisation exists on a continuum and that binary classifications may not reflect technical reality. The authority is seeking feedback from industry participants, developers, and legal experts on the proposal.
Global regulatory precedent
Malta’s approach mirrors similar discussions in other jurisdictions. United States regulators, including the Securities and Exchange Commission, have pursued enforcement actions against DeFi protocols by arguing their operators maintain sufficient control to constitute securities offerings.
In Africa, where DeFi adoption has grown rapidly, particularly for cross-border payments and dollar access, the regulatory landscape remains fragmented. Nigeria, South Africa, and Kenya have each taken different approaches to crypto oversight, with none yet establishing clear frameworks for DeFi specifically.
The MFSA consultation arrives as African regulators watch European developments closely. Several African nations have indicated interest in adapting MiCA principles to their own markets, making Malta’s interpretation potentially influential beyond Europe.
Industry reaction uncertain
DeFi advocates have long argued that truly decentralised protocols should remain outside traditional regulatory frameworks because no single entity controls them. Critics counter that many so-called DeFi projects maintain centralised control points while claiming decentralisation to avoid oversight.
The consultation period remains open, with the MFSA expected to publish findings and potential guidance later in 2025. Any final approach would need alignment with EU-wide MiCA implementation, as member states cannot unilaterally expand the regulation’s scope without European Commission involvement.
The proposal reflects growing regulatory sophistication around crypto and DeFi globally, as authorities move beyond simple definitions toward more nuanced frameworks that account for technical architecture and actual control structures.