Global securities regulators presented their first blueprint to hold players in “decentralized finance” (DeFi) responsible for their activities and preserve market stability.
DeFi platforms enable users to lend, borrow, and save digital assets by using the blockchain technology that is the foundation of crypto assets. This allows users to circumvent the conventional gatekeepers of finance, such as banks and exchanges.
According to IOSCO, the worldwide umbrella group for securities watchdogs from around the globe, the failure of the cryptocurrency exchange FTX and the Terra USD stablecoin in 2022 demonstrated how shocks in one section of the cryptocurrency market may spark billions of dollars in outflows from DeFI applications.
Due to such occurrences, the size of the DeFi sector has decreased from around $180 billion in late 2021 to approximately $40 billion. According to IOSCO, the sector is also being utilized for money laundering.
According to Tuang Lee Lim, head of a fintech task force at IOSCO, “it is a common misconception that DeFi is truly decentralized and governed by autonomous code or smart contracts.” “There is a common misconception that DeFi is truly decentralized and governed by autonomous code or smart contracts.”
The participants and their roles and the organizational, technical, and communication systems utilized by participants in decentralized finance tend to be similar to those found in conventional finance.
“In reality,’responsible persons’ can be identified with the DeFi arrangement,” stated Lim, “regardless of the operating model of the DeFi arrangement.”
According to IOSCO, regulators have limited access to standardized data on DeFI. This scenario is even more dire because market players use many pseudonymous addresses to conceal their activity.
The watchdog has suggested a framework for regulators in all 130 countries covered by its membership to provide investor protection and stable markets using DeFi, detect and manage risks, acquire clear disclosures, and cross-border cooperation to enforce relevant laws. These goals are intended to be accomplished via the use of DeFi.
According to IOSCO, regulators should use existing regulations or propose new ones as necessary to gain a complete picture of DeFI, including the names of persons and firms involved.
Public consultation on the plans, which dovetail with recommendations from IOSCO in May to govern crypto assets themselves, is scheduled to run through the middle of October before the framework is finalized sometime around the end of 2023.
IOSCO members have committed to following agreed-upon suggestions, and some member nations, notably the United States, have already started investigating how decentralized finance may be incorporated into current securities regulations.