FATF Warns Decentralized Finance Platforms May Not Be as Decentralized as They Claim

The Financial Action Task Force (FATF) has issued a warning that many decentralized finance (DeFi) platforms are not as decentralized as they claim, and that their existing rules apply to DeFi arrangements whenever an identifiable person or entity exercises control or sufficient influence.

According to the FATF's report published on July 21, the watchdog divides DeFi arrangements into three broad categories: platforms with identifiable controllers; platforms that are effectively centralized but whose operators remain hidden; and a smaller group of genuinely leaderless protocols. Only the last category falls outside FATF’s standards.

The report highlights several indicators that suggest centralized control may remain, including concentrated holdings of governance tokens, administrative privileges, control over protocol upgrades, and the distribution of fees and rewards. The FATF also notes that features commonly associated with DeFi do not necessarily make a platform decentralized for regulatory purposes.

Implementation has been sparse, with nearly 93% of jurisdictions responding to a recent FATF survey having never applied the standards to a qualifying DeFi arrangement. The report recommends that jurisdictions require or encourage DeFi projects to incorporate anti-money laundering (AML) safeguards directly into smart contracts or user interfaces.