ESMA Proposes First Comprehensive DeFi Regulatory Framework for the EU
The European Securities and Markets Authority has published a consultation paper outlining a tiered approach to regulating decentralised finance protocols, distinguishing between fully decentralised systems and those retaining governance control by identifiable parties.
The European Securities and Markets Authority published a 147-page consultation paper proposing the EU's first formal regulatory framework for decentralised finance (DeFi), drawing a legal distinction between protocols with identifiable governance actors — which would fall under MiCA or MiFID II — and protocols that ESMA deems sufficiently decentralised to warrant a separate disclosure-only regime.
The proposed framework introduces the concept of a 'DeFi Responsible Person' — any natural or legal person who deploys, controls, or materially profits from a DeFi protocol and who would bear regulatory obligations in cases where the protocol is not sufficiently decentralised. Governance token holders exercising material voting power may be captured under this definition.
For protocols that meet ESMA's decentralisation threshold, the paper proposes a lighter-touch disclosure regime: on-chain publication of protocol documentation, audit reports, and smart contract risk disclosures. No licensing would be required, but ESMA would retain the authority to revoke decentralisation status and impose full MiCA obligations if governance structures change.
The consultation runs until 30 September 2026. Industry responses from DeFi protocol foundations, legal associations, and banking groups are expected to challenge the practicality of the decentralisation threshold and the proposed liability framework for governance token holders. ESMA aims to publish final technical standards by Q2 2027.