DeFi Regulation Becomes a Global Issue in 2025: Balancing Innovation, Risk, and the Urgency of Oversight

The decentralized finance (DeFi) sector has emerged as a central focus within the global financial landscape. After several years of rapid growth with minimal oversight, 2025 marks a turning point where regulation surrounding DeFi transitions from a fringe topic to a strategic global concern.

Recent reports from the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) indicate that while DeFi currently accounts for only about 4% of the European Union’s total crypto market capitalization, the surge in both user participation and Total Value Locked (TVL) highlights an emerging systemic risk to traditional finance.

Meanwhile, an analysis by the Organisation for Economic Co-operation and Development (OECD) notes that the borderless adoption of DeFi has outpaced the development of regulatory frameworks, making legal protection for investors and consumers a growing priority for global regulators.

Why DeFi Regulation Is Under Global Scrutiny

1. Systemic Risk and Anti–Money Laundering (AML) Concerns

DeFi essentially replicates traditional financial services  such as lending, saving, and asset exchange  but without centralized intermediaries.
This lack of a single governing authority presents a major dilemma for regulators: who is responsible when losses, protocol failures, or security exploits occur?

An academic publication noted, “The functions of DeFi mirror those of traditional finance  and so do its risks.”
This underscores the urgent need for clearer and stronger regulatory frameworks across the DeFi ecosystem.

2. Legal Gaps and Undefined Regulatory Boundaries

In Europe, the Markets in Crypto-Assets Regulation (MiCA) officially took effect at the end of 2024. However, the framework explicitly excludes fully decentralized DeFi protocols.
As a result, many DeFi projects continue to operate within a legal grey area.

The lack of a clear definition of “decentralization” and the uncertainty surrounding the scope of regulation have prompted the European Union to accelerate efforts in drafting new policy guidelines.

3. Shifting Regulatory Approaches in the U.S. and Beyond

In the United States, the Securities and Exchange Commission (SEC) has shifted from an enforcement-based approach toward establishing clearer rulemaking frameworks for DeFi participants.This marks a strategic shift from “wait and act” to “design and direct”, aiming to provide greater legal clarity for developers and protocol users.

Implications and Emerging Risks

For developers and protocol operators, upcoming regulations are expected to include requirements such as:

• Know Your Customer (KYC) compliance,

• Smart contract security audits,

• Real-time transaction reporting, and

• Potential classification of protocols as financial service providers.

A legislative proposal in the U.S. even suggests that DeFi protocols with centralized voting control could be categorized as money service businesses (MSBs).

For investors, regulatory uncertainty introduces additional risks  popular protocols could face sanctions or regional bans, potentially triggering capital migration toward jurisdictions with more lenient policies. From a global crypto market perspective, well-designed regulation could boost institutional confidence and accelerate adoption. However, excessively strict policies may stifle innovation and provoke regulatory panic across the industry.

DeFi Regulation: The Next Policy Frontier

The European Union has indicated that developing a comprehensive DeFi regulatory framework will become a top policy priority by 2026, with consultations and draft proposals already underway in 2025. In the United States, discussions on a dedicated DeFi bill are also emerging  including potential rules for front-end interfaces and core protocol governance.

In response, several DeFi projects have begun adopting self-regulatory measures establishing internal governance models and security standards to demonstrate commitment to transparency and compliance without compromising innovation.

A Turning Point for Global Financial Policy

DeFi regulation has officially evolved into one of the most critical financial policy issues of 2025. This shift is driven not only by the rapid growth of blockchain technology but also by its tangible impact on financial stability and investor protection.

For the crypto industry including developers, investors, and content creators  this dynamic marks a pivotal moment to understand regulatory direction, prepare adaptive strategies, and strengthen public education on security, innovation, and risk awareness in an ever-evolving DeFi ecosystem.