Institutions in highly regulated domains such as finance and healthcare often have restrictive rules around data sharing. Federated learning is a distributed learning framework that enables multi-institutional collaborations on decentralized data with improved protection for each collaborator’s data privacy. In this paper, we propose a communication-efficient scheme for decentralized federated learning called ProxyFL, or proxy-based federated learning. Each participant in ProxyFL maintains two models, a private model, and a publicly shared proxy model designed to protect the participant’s privacy. Proxy models allow efficient information exchange among participants without the need of a centralized server. The proposed method eliminates a significant limitation of canonical federated learning by allowing model heterogeneity; each participant can have a private model with any architecture. Furthermore, our protocol for communication by proxy leads to stronger privacy guarantees using differential privacy analysis. Experiments on popular image datasets, and a cancer diagnostic problem using high-quality gigapixel histology whole slide images, show that ProxyFL can outperform existing alternatives with much less communication overhead and stronger privacy.