Are you wondering whether the rules that govern traditional finance will also apply to your crypto earnings? This article explains how regulators can assess decentralized finance (DeFi) and staking based on the activities they perform, rather than the underlying blockchain technology.
What “function‑based” regulation means
In the world of finance, laws are usually written to address specific services—lending, custodial storage, asset management, and so on. When a new technology appears, regulators can either create brand‑new rules for that technology or apply existing rules to the same activities, regardless of the tech used. Function‑based regulation follows the latter approach: it looks at what is actually happening, the risks created, and who bears those risks.
Key terms you’ll encounter:
- Decentralized finance (DeFi): Financial services—such as lending, borrowing, or trading—delivered through smart contracts on a blockchain without a central intermediary.
- Staking: The process of locking or delegating cryptocurrency tokens to help secure a proof‑of‑stake network, earning rewards in return.
- Custody: Holding and controlling a user’s assets on their behalf. Custodial services create a fiduciary relationship and often trigger stricter regulatory oversight.
- MiCA (Markets in Crypto‑Assets Regulation): The European Union’s comprehensive framework that sets rules for crypto‑asset issuers, service providers, and markets.
When regulators focus on the function—e.g., “providing a lending service” or “safeguarding users’ assets”—they can apply the same consumer‑protection, anti‑money‑laundering (AML), and market‑integrity standards that already exist for banks and broker‑dealers. This avoids a fragmented legal landscape where the same activity is treated differently simply because it runs on a blockchain.
Real‑world illustration: Cardano Foundation’s submission to the EU
In October 2026, the Cardano Foundation submitted a 19‑page paper to the European Commission urging the EU not to create separate MiCA rules for DeFi and staking. The foundation argued that existing financial legislation should govern these services based on the risks they pose, not the fact that they use the Cardano blockchain.
The submission highlighted a key distinction: when Cardano users delegate their ADA tokens to validators, they do not surrender custody of their tokens, nor are the tokens locked. This “delegation” activity helps secure the network and earns rewards, but it differs fundamentally from a custodial staking service that holds users’ assets in a pool. By treating the two activities the same under MiCA, the foundation warned that regulators could create uncertainty for businesses that simply facilitate delegation.
Furthermore, the foundation cautioned that overlapping MiCA requirements with existing EU financial laws could lead to inconsistent interpretations across member states, making it harder for crypto firms to operate across the single market.
What this means for you, the everyday crypto earner
If you earn passive income by staking or participating in DeFi protocols, the regulatory approach taken can affect several practical aspects:
- Tax reporting: Function‑based rules often align crypto earnings with existing tax treatment for interest, dividends, or capital gains, simplifying compliance.
- Platform safety: Services that involve custody are more likely to be subject to licensing, capital‑adequacy, and insurance requirements, offering additional protection for your funds.
- Access to services: Clear, technology‑agnostic rules make it easier for new platforms to launch across the EU, expanding the options you have for earning.
- Cost of participation: Non‑custodial staking (like delegating on Cardano) may avoid the fees and compliance costs that custodial services bear, potentially improving your net rewards.
How to evaluate a DeFi or staking service
When deciding whether to trust a platform with your tokens, consider these concrete checks:
- Custodial vs. non‑custodial: Does the service hold your private keys, or do you retain control while delegating or interacting through smart contracts?
- Regulatory status: Is the provider licensed under existing financial laws (e.g., as a payment institution or investment firm), or are they operating without a specific crypto licence?
- Risk disclosures: Does the platform clearly explain the risks—such as smart‑contract bugs, validator slashing, or liquidity shortages—and how they are mitigated?
- Audit and security reports: Look for third‑party audits of the smart contracts and any insurance or compensation mechanisms for loss.
- Transparency of fees: Understand how rewards are calculated and what fees are taken, especially if the service acts as an intermediary.
FAQ
Q: Does staking always count as a financial service?
A: Not necessarily. Non‑custodial delegation, where you keep control of your tokens, is generally viewed as participation in network security rather than a service offering. Custodial staking—where a provider holds your tokens and distributes rewards—fits the definition of a financial service and may be regulated accordingly.
Q: Will MiCA create a separate “staking” licence?
A: The EU is still debating this. Industry groups, including the Cardano Foundation, argue that existing financial licences already cover the risks of custodial staking, so a new, technology‑specific licence could be redundant.
Q: How can I protect myself if a DeFi platform is unregulated?
A: Use non‑custodial solutions whenever possible, keep your private keys, and only allocate funds you can afford to lose. Diversify across multiple protocols and stay informed about any regulatory changes that might affect the platforms you use.
Q: Does function‑based regulation mean fewer consumer protections?
A: On the contrary, it aims to apply the same consumer‑protection standards that exist for traditional finance. The key is that the activity, not the technology, triggers those protections.
This article references reporting from cointelegraph.com.
