Decentralised finance
DeFiAlso called decentralized finance, deFi protocols
Decentralised finance is a set of crypto-asset services, such as trading, lending and borrowing, run by smart contracts on public blockchains rather than by a bank or exchange. Users connect their own wallets and deal directly with the code. Whether AML and licensing rules apply depends on who controls the service.
How it works
A DeFi protocol is code deployed on a blockchain that holds pooled crypto-assets and executes trades or loans automatically. Users interact through a website or app, keep their assets in self-hosted wallets and often face no identity checks. Many protocols are governed by token holders who vote on changes, though developers or a small group frequently keep admin keys or other control.
For compliance teams, DeFi matters in two ways. FATF says people who keep control or sufficient influence over a DeFi arrangement can be virtual asset service providers with full AML duties. Banks and exchanges also treat exposure to DeFi as a risk factor, because criminals and sanctioned groups use protocols, bridges and mixers to move and layer stolen funds.
The rules
States that creators, owners and operators who keep control or sufficient influence over a DeFi arrangement may be VASPs, even if it appears decentralised.
Countries and virtual asset service providersLeaves crypto-asset services provided in a fully decentralised manner, without any intermediary, outside MiCA's scope; partly decentralised services remain covered.
Crypto-asset service providers and issuers in the EUFinds that DeFi services which perform covered functions already have BSA and sanctions obligations, and that non-compliance is the main weakness criminals exploit.
DeFi services covered by the Bank Secrecy Act and sanctions lawCommon questions
Is DeFi regulated?
Partly. FATF, the EU and the US apply AML and licensing rules to anyone who controls a DeFi service or performs a regulated function. Truly decentralised protocols with no controlling person fall outside most current regimes.
Why is DeFi a money laundering risk?
Users trade without identity checks, transfers are fast and cross-border, and protocols can swap assets across chains in seconds. Hackers and sanctioned groups use DeFi to convert and move stolen funds before cashing out.
How do banks manage DeFi exposure?
They use blockchain analytics to see whether customer funds came from or went to DeFi protocols, set risk ratings for that activity and review transfers linked to high-risk protocols, bridges or mixers.
