The Malta Financial Services Authority (MFSA) is seeking feedback on whether decentralization should be assessed as a continuum rather than a strict binary concept.

The regulator is examining how decentralized finance (DeFi) could be incorporated into the European Union’s Markets in Crypto-Assets (MiCA) framework, with particular focus on governance structures, accountability, and defining what qualifies as “fully decentralized.”

In a discussion paper published Wednesday, the MFSA noted that MiCA excludes crypto-asset services operating in a fully decentralized manner without intermediaries. However, it said many DeFi protocols still include centralized features such as administrator keys, concentrated governance control, upgrade rights, and oversight of user interfaces.

The authority is asking whether a spectrum-based approach would better reflect real-world decentralization and whether standardized criteria should be developed to determine when a protocol falls outside MiCA’s regulatory scope.

It added that DeFi remains a grey area under EU regulation due to the lack of a clear threshold for determining when decentralization is sufficient for exemption.

The MFSA also raised the possibility that regulated crypto firms could be required to conduct smart contract audits, governance reviews, and risk assessments before integrating DeFi protocols.

Beyond MiCA, the paper explores potential legal structures for DeFi projects, including decentralized autonomous organizations (DAOs) and segregated cell companies.

It also introduces the concept of “guardian agents,” defined as automated mechanisms that monitor and constrain autonomous systems to ensure compliance with predefined rules and risk parameters.

The consultation period runs until July 10.