ESMA Proposes Regulations for DeFi Gateways

The European Securities and Markets Authority (ESMA) has proposed new regulations for companies that provide access to decentralized finance (DeFi) protocols. According to ESMA, these companies, known as gateways, would be responsible for checking the protocols they connect investors to, explaining how transactions are routed, and disclosing conflicts of interest.

The proposed regulations would also introduce clearer criteria for determining which activities are genuinely decentralized. ESMA suggests that a protocol would need to meet a stricter test to be treated as outside the regulated framework, rather than relying on a broad claim that it is decentralized.

The proposed gateway category would cover firms that provide technical interfaces into DeFi or route transactions to protocols. These firms would have to disclose information about commercial terms, such as costs, collateral arrangements, and potential losses, before an investment decision is made.

ESMA's proposal arrives at a time when DeFi activity is growing, with Aave V4's total value locked rising 82% to $653.8 million in September. However, it is unclear whether established Ethereum protocols, such as Aave, would be classified as regulated gateways.

The proposed regulations would also prevent regulated firms from offering MiCA-compliant services linked to stablecoins that do not meet MiCA requirements. This could affect the stablecoins used to enter or exit a DeFi protocol.