DeFi lending explained: Morpho on regulation, adoption, and the future of on-chain credit

Ahead of Money Motion 2026, The Paypers speaks with Faustine Fleuret, Head of Public Affairs at Morpho, about the evolution of DeFi lending and its growing relevance for the financial industry.  

For readers new to Morpho, what does the protocol do, and how does your professional background connect to Morpho’s mission? 

Morpho is a French fintech company developing open blockchain infrastructure for lending and borrowing. Founded in 2021, it has become one of the most widely used decentralized lending protocols globally. Its infrastructure is integrated by major crypto-native and fintech players, including Coinbase and Circle, and enables users and institutions to supply or borrow digital assets in a transparent, noncustodial environment. 

My background is in public affairs and financial regulation. I have long worked at the intersection of innovation and policy, helping authorities understand emerging financial technologies while ensuring that new frameworks remain proportionate and innovation-friendly. At Morpho, I focus on fostering dialogue between DeFi builders and regulators, ensuring that policy discussions are grounded in how these protocols actually function and in their potential contribution to more open and resilient financial markets. 

For a TradFi audience: what is a DeFi lending protocol, and how does it work in practice? What are the key similarities and differences compared to traditional lending? Do you see DeFi lending evolving as a complement to traditional credit markets, or as a parallel system with its own rules and participants? 

In traditional finance, banks act as intermediaries: they collect deposits and grant loans in fiat currencies, which borrowers repay with interest. Credit creation is closely linked to the banking system and regulated institutions. 

DeFi lending follows the same economic logic, matching those who have capital with those who need it, but it does so through blockchain-based infrastructure rather than through a bank. Lenders can make their digital assets available to borrowers and receive interest in return. Borrowers, for their part, provide collateral and access liquidity under predefined rules. These rules are executed automatically by smart contracts instead of being managed by banks. 

Loans are denominated in crypto-assets, such as cryptocurrencies, stablecoins, or tokenized securities. At this stage, DeFi lending mainly complements traditional credit markets by serving digital asset markets and segments that may not be fully addressed by conventional financial institutions. Over time, as tokenization progresses, stronger connections between traditional and onchain credit are likely to emerge. 

What problems does DeFi lending aim to solve, and where does it deliver clear advantages over existing financial models? 

DeFi lending addresses structural frictions in finance: opacity, limited access, and operational inefficiencies. By operating on public blockchains, it provides real-time transparency on liquidity, collateralisation levels, and risk parameters. Settlement is near-instant and does not depend on fragmented intermediaries or business hours. 

It also broadens access to capital. Anyone with eligible collateral can interact with a protocol, without requiring a traditional banking relationship. For lenders, DeFi enables direct exposure to credit markets and potentially more granular risk selection. 

The advantages are most visible in efficiency and programmability. Smart contracts reduce manual processing, automate risk management, and enable composability (meaning different financial services can interact seamlessly on-chain). This does not eliminate risk, but it makes it more measurable and transparent. 

'Decentralized lending is a new technological layer that can make credit markets more transparent, efficient, and accessible. The real challenge is not to multiply new rules, but to ensure clarity on how existing regulatory frameworks apply when financial institutions move onchain. As tokenization progresses, more assets and liquidity will circulate through blockchain-based infrastructure. Banks, fintechs, and payment providers will inevitably interact with these systems. The question is therefore not whether DeFi will coexist with traditional finance, but how this coexistence can be organised responsibly. Public authorities have a role to play in providing legal certainty, while market participants must uphold high standards of risk management and compliance. If approached thoughtfully, onchain finance can strengthen competitiveness without compromising financial stability.' 

What are the main challenges, technical, operational, or cultural, when institutions explore or adopt DeFi lending solutions? 

Education remains the first challenge. Many institutions still see DeFi as a competitor rather than as an infrastructure they can use. There is often a perception that decentralized protocols aim to replace traditional actors, whereas they can also serve as new technological rails on which banks, fintechs, and other financial institutions can build services. 

The transition nevertheless requires adjustments. Moving part of one’s activity onchain means rethinking internal processes, governance, risk management, and compliance frameworks. Institutions must ensure that interacting with decentralized protocols remains fully consistent with their regulatory obligations. 

There is also a cultural dimension. DeFi operates with a high degree of transparency and standardisation, which differs from the more relationship-driven and permissioned nature of traditional finance. Bridging these two environments requires dialogue and experimentation. The objective is not to oppose models, but to find ways for them to coexist and reinforce one another. 

Regulation remains a key concern. How do you view the current regulatory landscape for DeFi, and what impact could initiatives like the US Clarity Act have on the sector? 

The central issue is not the absence of regulation, but regulatory clarity. Financial institutions already operate under extensive rules covering market conduct, prudential requirements, AML/CFT, and consumer protection. Their primary concern is how these obligations apply when interacting with decentralized protocols. 

Before introducing new layers of regulation specific to DeFi, policymakers should assess whether existing frameworks already address the relevant risks. In many cases, the need is for interpretative guidance and supervisory convergence rather than entirely new regimes. 

In the US, initiatives such as the Clarity Act aim to provide clearer classifications and delineations of responsibilities. Greater legal certainty would support responsible innovation and institutional participation. Both US and EU policymakers face a strategic question: how to foster on-chain finance while preserving financial stability and competitiveness. Overregulation risks driving innovation offshore; insufficient clarity risks stalling institutional adoption. 

Looking ahead to Money Motion 2026, what topic will you focus on, and why is it particularly relevant for banks, fintechs, and payment providers today? 

At Money Motion 2026, I will focus on the tokenization of finance and the emergence of onchain market infrastructures, which is a huge shift happening right now in the finance world. 

For banks, fintech companies, and payment providers, the key issue is strategic positioning. As assets and liquidity move onchain, institutions have to decide whether to treat blockchain as a niche innovation or as core infrastructure. This transition also raises questions of technological sovereignty, cross-border competitiveness, and regulatory coordination. 

About the author 

Faustine Fleuret is the Head of Public Affairs at Morpho, the second biggest DeFi lending protocol in the world. 

Before joining Morpho, she was the co-founder and CEO of Europe’s largest industry association (Adan) for 5 years: she represented and defended Web3 professionals mainly by educating and negotiating with policy-makers and non-native Web3 companies, as well as participating in building all major French and European regulations (including MiCA). 

Before Adan, she worked for the French financial regulator (AMF), the French financial markets professional body (AMAFI), and ConsenSys. She is the co-author of two books on the European MiFID 2 regulation, followed by two on the regulation of crypto-asset markets, the latest of which was published in October 2024.