The International Organization of Securities Commissions (IOSCO) issued its policy recommendations for decentralized finance (DeFi) on Dec 19th, with the aim to provide guidance for regulators around the world to supervise and regulate DeFi activities and mechanisms, as well as to protect investors and promote market integrity.
According to IOSCO’s policy recommendations for DeFi, regulators should adopt a risk-based approach to supervise DeFi activities and mechanisms. That means that they should identify the key risks associated with each DeFi product or service, such as market risk, operational risk, legal risk, compliance risk, cyber risk, and consumer protection risk.
IOSCO also suggests that regulators should consider how DeFi activities are governed by smart contracts or other automated rules that may not be easily understood or audited by human oversight. In such cases, regulators should ensure that there is adequate transparency and accountability for the design and implementation of these rules.
Moreover, IOSCO advises regulators to cooperate with each other and other DeFi community stakeholders, such as industry associations, standard-setters, academics, researchers, developers, users, and auditors. That would help them share information and best practices for regulating DeFi effectively.
IOSCO’s Recommendations For Responsible Persons
One of the main challenges for regulators is identifying who is responsible for a particular DeFi activity or mechanism. Since there is no central entity or intermediary in most cases of DeFi transactions or operations on blockchain networks like Ethereum or Binance Smart Chain (BSC), it can be difficult to determine who controls or influences them.
Exercising control or sufficient influence over a financial product offered, financial service provided, or financial activity engaged in by the DeFi arrangement, the report mentioned.
If a DeFi activity involves securities issuance or trading under securities laws or regulations in one jurisdiction (such as an initial coin offering (ICO) or an exchange-traded fund (ETF)), then it should be subject to those laws or regulations.
If a DeFi activity involves payment services underpayment laws or regulations in one jurisdiction (such as stablecoins or payment tokens), then it should be subject to those laws or regulations.
Existing rules may need changes to address new situations, the IOSCO said. The guidance for decentralized finance discusses identifying accountable parties, establishing clear transparency standards, and enforcing regulations.
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