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Report Reveals Global Regulators Setting Sights on DeFi
- New report from the International Organisation of Securities Regulators makes 9 recommendations to its members; encourages a “same activity, same risk, same regulation” approach to DeFi.
- Recommendations intended to improve market integrity and increase investor protections.
- Report may herald a significant increase in crypto regulation globally starting in 2024.
A report released December 19 by the International Organisation of Securities Commissions (IOSCO) has made nine recommendations regarding the regulation of decentralised finance (DeFi). IOSCO said the recommendations to its members, which include securities regulators in over 95% of global securities markets (e.g., ASIC in Australia), are intended to improve DeFi market integrity and increase investor protections.
This report follows IOSCO’s report ‘Policy Recommendations for Crypto and Digital Asset Markets’, which was released in November 2023. Taken together the two reports form IOSCO’s full recommended regulatory approach to crypto markets.
Report Encourages ‘Same Activity, Same Risk, Same Regulation’
IOSCO’s stated goal is to encourage a “same activity, same risk, same regulation/regulatory outcome” approach to DeFi — this means if a DeFi platform performs the same activities as a TradFi counterpart it should be subject to the same regulation.
Its latest report suggests existing legislation will be adequate to regulate DeFi in some jurisdictions, while others may need new legislation. IOSCO said this approach would help create fair competition between TradFi and DeFi and improve investor protections:
To facilitate a level-playing field between crypto-asset markets and traditional financial markets and to reduce the risk of regulatory arbitrage, regulatory frameworks for DeFi (existing or new) should seek to achieve regulatory outcomes for investor protection and market integrity that are the same as, or consistent with, those required in traditional financial markets.
Policy Recommendations For Decentralised Finance, IOSCO
The nine recommendations are:
- Analyse DeFi products, services, activities and arrangements to assess regulatory responses.
- Identify responsible persons.
- Achieve common standards of regulatory outcomes.
- Require identification and addressing of conflicts of interest.
- Require identification and addressing or material risks, including operational and technology risks.
- Require clear, accurate and comprehensive disclosures.
- Enforce applicable laws.
- Promote cross-border cooperation and information sharing.
- Understand and assess interconnections among the DeFi market, the broader crypto-asset market, and traditional financial markets.
Implications Of This Approach
The policy recommendations included in the report, if implemented, would effectively mean DeFi is regulated like existing TradFi financial institutions.
This would result in a much higher regulatory bar for anti-money laundering measures, financial reporting requirements and identification of conflicts of interest — including ensuring that individuals who hold large percentages of governance tokens are not voting in their own interest and against investors’ interests.
The report also recognises the cross-border nature of many DeFi projects and recommends that regulators in one jurisdiction should be able to share information and cooperate with regulators in another jurisdiction — meaning popular loopholes like creating a decentralised autonomous organisation (DAO) in a crypto safe haven wouldn’t necessarily protect founders from regulatory breaches in another jurisdiction.
CEO of digital wallet and payments platform Everest, Bob Reid, noted the approach would see many existing laws applied.
IOSCO said the release of this report signals it is “now shifting attention towards implementation monitoring, capacity building and technical assistance needs of its members”, suggesting 2024 may see a substantial increase in regulation of crypto markets globally.
Author
Jody McDonald
Jody is a Brisbane-based freelance writer who specialises in writing about business, technology, and the future of work.
