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On DeFi and On-Chain CeFi: How (Not) to Regulate Decentralized Finance

Publication by Katrin Schuler, Ann Sofie Cloots, and Fabian Schär in the Journal of Financial Regulation

This article proposes a framework to assess the factual decentralization of blockchain-based financial infrastructure, commonly referred to as ‘decentralized finance’ (DeFi). It discusses various centralization vectors along the DeFi architecture layers from a technological and legal point of view. Distinguishing between endogenous and inherited centralization, the importance of decentralization assessments for regulators is demonstrated. First, centralization vectors are a strong indication that a DeFi project may have (some) custodial properties warranting regulation. Second, centralization vectors reveal the avenues of control in projects, pointing out appropriate regulatory hooks. The article serves as an interdisciplinary introduction that analyses blockchain-based financial infrastructure and provides policymakers and regulators with a tool to identify the differences between truly independent, neutral infrastructure and fake decentralization. It concludes that the former may have very beneficial properties and can contribute towards a more open and transparent financial system, while the latter is a blockchain-based form of financial intermediation and should be regulated as such.


  • Framework to assess DeFi projects for factual decentralization.
  • First paper combining technical analysis with legal perspective.
  • Differentiation between endogenous centralization and centralization inheritance.
  • Examples of common centralization vectors across DeFi stack that result in on-chain CeFi.
  • Legal considerations and challenges around common centralization vectors.