IOSCO wants key actors in DeFi to bear responsibility over investor protection and market integrity

The International Organization of Securities Commissions (IOSCO), the global standard setter for securities markets, has taken a significant step towards regulating the burgeoning world of Decentralised Finance (DeFi).

IOSCO has released nine policy recommendations for consultation, aimed at addressing market integrity and investor protection concerns within the DeFi space.

DeFi structures, common standards, key risks, and transparency

These recommendations cover six key areas, aligning with the IOSCO Objectives and Principles for Securities Regulation, along with relevant supporting standards, recommendations, and best practices. The areas of focus are as follows:

Understanding DeFi Arrangements and Structures: Establishing a clear understanding of the diverse range of DeFi structures and their implications.

Achieving Common Standards of Regulatory Outcomes: Ensuring that regulatory outcomes are consistent and harmonized across different jurisdictions.

Identification and Management of Key Risks: Identifying and mitigating the significant risks associated with DeFi.

Clear, Accurate and Comprehensive Disclosures: Promoting transparency through clear and comprehensive disclosures.

Enforcement of Applicable Laws: Ensuring that DeFi platforms and participants adhere to relevant laws and regulations.

Cross-Border Cooperation: Encouraging collaboration among regulatory authorities across borders to address global DeFi challenges.

Jean-Paul Servais, Chair of the IOSCO Board, said: “Once finalized, the two sets of Recommendations will provide a first clear, interoperable, and globally consistent policy framework for crypto and digital assets, including DeFi. This report marks a significant step forward in achieving regulatory outcomes for investor protection and market integrity that are the same as, or consistent with, those required in traditional financial markets across IOSCO’s 130 member jurisdictions.”

Misconception surrounding the decentralization of DeFi

One crucial aspect highlighted by IOSCO is the misconception surrounding the decentralization of DeFi. Despite the autonomy associated with DeFi protocols and smart contracts, “responsible persons” can be identified. These individuals, whether legal entities or natural persons, are seen as key actors who should bear responsibility for upholding investor protection and market integrity.

Tuang Lee Lim, Chair of IOSCO’s Board-Level Fintech Task Force, commented: “Our recommendations are therefore predicated on the need to identify these persons, whether legal or natural, who should bear responsibility for upholding investor protection and market integrity.”

IOSCO has opened the recommendations for public consultation, seeking input from industry stakeholders and experts. The organization aims to finalize the DeFi recommendations by the end of 2023, in line with its Crypto-Asset Roadmap established in July 2022. This effort is intended to work in conjunction with IOSCO’s existing recommendations for Crypto and Digital Assets (CDA).

As the DeFi landscape continues to evolve and gain prominence in the financial world, regulatory initiatives like these from IOSCO are crucial in providing clarity, consistency, and investor protection within the decentralized finance ecosystem.