Global regulators have released the first blueprint for holding participants in “decentralised finance” (DeFi) accountable for their actions and safeguarding market stability. DeFi platforms allow users to lend, borrow, and save in digital assets, bypassing traditional financial intermediaries such as banks and exchanges by utilizing blockchain technology. The collapse of the crypto exchange FTX and the Terra USD stablecoin in 2022 highlighted the potential for shocks in the crypto market to trigger significant outflows from DeFi applications, resulting in a decline in the sector’s value from $180 billion in late 2021 to around $40 billion currently. Additionally, DeFi has been exploited for money laundering purposes, according to the International Organization of Securities Commissions (IOSCO), the global umbrella body for securities regulators.
IOSCO’s fintech taskforce chair, Tuang Lee Lim, stated that there is a misconception that DeFi is entirely decentralized and governed by autonomous code or smart contracts. In reality, DeFi stakeholders and their roles, along with the organizational, technological, and communication mechanisms they employ, mirror those of traditional finance. Lim emphasized that regardless of the DeFi arrangement’s operating model, it is possible to identify “responsible persons.”
One of the challenges faced by regulators is the limited standardized data on DeFi, exacerbated by market participants using multiple pseudonymous addresses to obscure their activities. In response, IOSCO has proposed a framework for regulators across its 130 member jurisdictions. The framework aims to ensure investor protection, maintain stable markets, identify and manage risks, obtain clear disclosures, and facilitate cross-border cooperation to enforce applicable laws.
To gain a comprehensive understanding of DeFi, IOSCO recommends that regulators utilize existing laws and, if necessary, introduce new ones. This would enable them to identify the individuals and companies involved in DeFi activities. The proposed framework is open for public consultation until mid-October, aligning with IOSCO’s previous proposals in May to regulate cryptoassets themselves. The finalized framework is expected to be completed by the end of 2023.
IOSCO members commit to implementing agreed recommendations. Some countries, such as the United States, have already started exploring the inclusion of DeFi within existing securities laws. As the DeFi sector continues to evolve, regulators are seeking to strike a balance between innovation and protecting investors and market stability.
More detail via The Star here… ( Image via The Star )