Regulators Out of Their Depth: Crypto's Uncharted Regulatory Landscape

The UK's incoming crypto asset regime and the EU's Markets in Crypto-Assets (MiCA) regulation are hailed as significant milestones for the industry. However, closer inspection reveals a paradox: while these regulations aim to bring order to the market, they primarily target centralised exchanges and service providers.

Decentralised finance services (DeFi), on the other hand, operate outside this regulatory framework. These services are built on blockchain protocols that provide lending, trading, payments, and other functions without intermediaries or traditional service providers.

This mismatch between regulation and market infrastructure creates a complex landscape for wealth managers to navigate. To ensure compliance, they must identify which services are decentralised and which have centralisation elements that require licensing.

Regulators struggle to oversee DeFi services because their regulatory tools are designed for centralised markets with intermediaries. As a result, the 'real' crypto sector, DeFi, remains largely unregulated.