Regulatory Ambiguity in Decentralized Finance (DeFi) and Crypto Assets

Abstract

This paper addresses the conflict between conventional statutory regulation and the decentralized mechanisms of Decentralized Finance (DeFi) and crypto-asset markets. Traditionally, financial regulation has been centralized through banks, brokerages and clearinghouses and has imposed anti-money laundering (AML) requirements, disclosure responsibilities and fiduciary duties. Permissionless blockchain networks can instead use autonomous and self-executing smart contracts, reducing the institutional control structure through which regulators normally intervene. The paper examines the European Union’s Markets in Crypto-Assets Regulation (MiCA), the United States’ use of existing securities and commodities law and India’s tax and compliance-based approach. It argues that inconsistent token classification, unclear legal terminology and uncertainty about the identity of the responsible actor can encourage jurisdictional arbitrage. The major legal issues include token classification, inter-agency jurisdictional conflicts, the absence of an identifiable and regulable person in some decentralized systems, unclear fiduciary duties and consumer protection gaps. The paper finds that an activity- and risk-based approach, in combination with strong global coordination, can create a more complete framework for regulating crypto assets without reliance on technological labels.