New regulations in the European Union (EU) could pose significant challenges for decentralised finance (DeFi) protocols.

The Markets in Crypto-Assets Regulation (MiCA) requires DeFi platforms to adhere to licensing and Know Your Customer (KYC) requirements, potentially forcing them to adopt centralised components.

This leaves DeFi protocols with the choice of either pivoting to a hybrid finance (HyFi) model or remaining fully decentralised to comply with regulations.

However, the sector may face a split between those embracing decentralisation and those opting for regulatory compliance to attract institutional investors.

Compliance tools are emerging, but DeFi protocols must navigate carefully in the evolving regulatory landscape of the EU.