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Global Regulators Propose Framework to Hold DeFi Accountable and Safeguard Market Stability

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Global Regulators Propose Framework to Hold DeFi Platforms Accountable

Global securities regulators have unveiled a blueprint to increase accountability in the fast-growing sector of decentralized finance (DeFi) and safeguard market stability. DeFi platforms allow users to lend, borrow, and save in digital assets, bypassing traditional financial institutions such as banks and exchanges by utilizing blockchain technology. The International Organization of Securities Commissions (IOSCO), the global umbrella body for securities watchdogs, highlighted the need for regulation in the wake of recent market shocks.

The collapse of crypto exchange FTX and the Terra USD stablecoin in 2022 exposed the vulnerability of DeFi applications. These events triggered billions of dollars in outflows from the sector, causing DeFi to shrink from about $180 billion in late 2021 to approximately $40 billion presently. IOSCO also raised concerns about the involvement of DeFi platforms in money laundering activities.

Contrary to the common belief that DeFi is truly decentralized and governed by autonomous code or smart contracts, IOSCO emphasized the presence of identifiable “responsible persons” within the sector. Stakeholders in DeFi, including their roles and organizational structures, closely resemble those in traditional finance. However, regulators currently lack standardized data on DeFi, as market participants often use multiple pseudonymous addresses to obscure their activities.

To address these challenges, IOSCO proposed a framework for regulators across its 130 member jurisdictions. The framework aims to ensure investor protection, stable markets, risk management, clear disclosures, and cross-border cooperation to enforce applicable laws. Regulators are encouraged to use existing laws or introduce new ones, where necessary, to obtain a comprehensive understanding of DeFi, including the identities of individuals and companies involved.

The proposed framework is open for public consultation until mid-October and is expected to be finalized by the end of 2023. IOSCO members, including the United States, commit to implementing agreed recommendations. Some countries have already begun exploring how DeFi can be incorporated into existing securities laws.

The regulation of DeFi has become an urgent priority, as the sector continues to grow rapidly and attract increased attention from investors. By establishing accountability and ensuring market stability, regulators aim to strike a balance between fostering innovation and protecting investors in this evolving landscape of decentralized finance.

More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )

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