European Securities and Markets Authority targets DeFi regulations
The European Securities and Markets Authority (ESMA) has formally submitted a series of proposals to the European Commission, pushing for comprehensive new regulations across the decentralized finance (DeFi) sector and tokenized securities.
These recommendations, lodged on September 30, 2026, aim to clarify what truly constitutes a “genuinely decentralized” activity under the Markets in Crypto-Assets (MiCA) framework, while also seeking expanded supervisory powers for financial watchdogs within the European Union.
Defining “Genuinely Decentralized” Activities for Markets Authority Oversight
ESMA’s move signals a concerted effort by EU regulators to bring innovative crypto models under a robust regulatory umbrella. The proposals respond to a consultation initiated by the European Commission earlier this year, underlining a broader strategic push to update MiCA and address evolving risks in the crypto market.
A central pillar of ESMA’s new proposals is the introduction of explicit criteria to determine what can be considered “genuinely decentralized.” The regulator intends for the “DeFi exemption” within MiCA to be as narrow as possible, aiming to prevent operators from using decentralization claims to circumvent regulatory obligations.
This stance directly confronts the ambiguity present in MiCA’s Recital 22, which suggests services provided in a “fully decentralised manner without any intermediary” fall outside its scope.
ESMA contends that elements such as open-source development, self-custody solutions, automated smart contracts, and permissionless infrastructure should not automatically qualify an activity as unregulated intermediation.
This perspective aligns with findings from a 2025 joint report by the European Banking Authority (EBA) and ESMA, which concluded that few systems truly achieve the total decentralization envisioned by MiCA. Many protocols, despite their decentralized branding, often retain identifiable actors, concentrated governance, or update rights.
Implications for DeFi Gateways and Protocols
To address these complexities, ESMA has proposed creating a new regulated category specifically for crypto firms that serve as gateways to DeFi protocols. These Crypto-Asset Service Providers (CASPs) would be responsible for providing technical interfaces or routing client transactions to decentralized platforms. Such “gatekeepers” would face stringent duties, including vetting protocols for legitimacy, disclosing risks transparently, and managing conflicts of interest.
The proposed framework also mandates operational and cybersecurity safeguards for these intermediary firms, ensuring greater user protection and market integrity. The European Banking Authority has echoed these concerns, warning that DeFi platforms are increasingly being used to seek high stablecoin yields, sometimes involving unlicensed stablecoins, creating a potential loophole for regulatory arbitrage. This shared perspective underscores a unified regulatory push.
Expanding Supervisory Powers and Investor Protections
Beyond defining decentralization, ESMA is actively seeking enhanced supervisory powers to combat fraud, improve investor protection, and strengthen anti-money laundering (AML) enforcement. The authority wants capabilities to detect, block, and deactivate fraudulent websites that target EU citizens. Furthermore, it aims to freeze crypto funds identified in violation of AML laws, significantly bolstering its enforcement toolkit.
The watchdog has also called for stricter rules concerning the marketing of crypto-assets, particularly those promoted by influencers and third parties. This move seeks to curb misleading promotions and ensure that retail investors receive clear, balanced information. ESMA also suggests adopting EU-wide rules for classifying crypto-assets, including hybrid tokens, granting it the authority to issue binding opinions on these classifications.
Another crucial area of focus is stablecoins. ESMA proposes explicitly prohibiting regulated crypto firms from offering services related to stablecoins that do not comply with MiCA regulations. This restriction would extend to custody and transfer services, aiming to prevent the proliferation of non-compliant stablecoins within the EU market.
The aim is to bolster financial stability and ensure that stablecoin card spending and other transactions are backed by robust compliance frameworks.
New Rules for Staking and Lending Services
The proposals also introduce proportionate disclosure requirements for staking and crypto lending activities. As these innovative financial models gain traction, ESMA emphasizes the need for transparency regarding costs, potential risks, expected rewards, and collateral arrangements. These disclosures are designed to give users a comprehensive understanding of the products they engage with, mitigating the risk of unexpected losses.
This initiative aims to bring a layer of regulatory clarity to areas of the crypto market that have historically operated with less oversight. By requiring detailed information, ESMA hopes to reduce information asymmetry and better protect participants in staking and lending protocols, which are growing areas of crypto investment.
Harmonizing Rules for Tokenized Securities
In parallel with its focus on DeFi, ESMA has reinforced the urgent need to harmonize rules for the region’s burgeoning tokenized capital markets. The authority stresses that a clear framework for tokenized securities and on-chain settlement is vital. This framework would support the development of an integrated European tokenized capital market, facilitating cross-border activity and boosting efficiency across the bloc.
The European Union’s proactive stance on tokenized securities mirrors similar efforts elsewhere. The U.S. Securities and Exchange Commission (SEC), for instance, has been pushing its own tokenized securities agenda through an “Innovation Exemption.” This American initiative aims to facilitate on-chain trading of tokenized National Market System stocks, allowing Tokenized Securities Venues (TSVs) to operate under specific conditions without traditional exchange registration.
The global market for tokenized securities has already reached $4.4 billion, representing 1% of the total stablecoin supply. Experts like Chris Burniske, formerly a crypto lead at Ark Invest, predict explosive growth for this sector.
“What happened to stablecoins will happen to tokenized equities—blockchains are unapologetically superior to TradFi’s rails,” Burniske stated, highlighting the transformative potential of blockchain technology for traditional finance. Meanwhile, Binance CEO Richard Teng projects the market could surge to $349 billion by 2030, a nearly 79-fold increase.
This substantial growth potential underscores the EU’s urgency in establishing a regulatory framework that can accommodate and secure on-chain settlement for overseas investors.
MiCA’s Evolution and the Path Ahead
These proposals are an integral part of the ongoing review of the MiCA regulation, which became fully applicable across the EU on July 1, 2026. The European Commission opened its MiCA review consultation on May 20, 2026, with submissions due by August 31, 2026. ESMA’s detailed recommendations serve as a critical response, providing a robust roadmap for future regulatory enhancements.
The feedback gathered during this review period is expected to be integrated into an updated MiCA framework by mid-2027. While ESMA’s recommendations are not yet binding rules, they represent a strong indication of the direction EU crypto policy is heading.
The aim is to foster legal certainty, improve investor protection, and address the evolving risks and opportunities presented by innovative crypto business models like DeFi, staking, and lending.
The European Union is attempting to strike a delicate balance: fostering innovation in the crypto space while simultaneously mitigating systemic risks and protecting consumers. This proactive regulatory approach, particularly in defining decentralization and supervising gateways, reflects a growing understanding among authorities of the unique challenges and potential vulnerabilities within the decentralized ecosystem.
As the EU continues to refine its EU crypto framework, market participants will be watching closely to see how these proposals ultimately reshape the digital asset landscape.