The Board of the International Organisation of Securities Commission (IOSCO) has today released a set of policy recommendations for decentralised finance (DeFi). It intends to build on the 2022 report, taking into consideration that the use of DLT-based applications have increased in scale and scope in the past year.
In its latest report, IOSCO, whose members include the US Securities and Exchange Commission and UK’s Financial Conduct Authority, seeks to provide recommendations and guidance to encourage members to analyse DeFi within their own regulatory frameworks.
In doing this, it has recognised the value of responsible innovation, but wants to make clear that market regulators globally should apply a “same activity, same risk, same regulatory outcome” approach to financial markets, even ones that use DeFi technology.
As a part of its recommendations, the IOSCO has asked regulators to aim to achieve a holistic and comprehensive understanding of these DeFi products, services, arrangements, and activities in order to inform regulatory responses. The report noted that it is critical to determine the appropriate response, including the potential application of IOSCO Standards through applicable regulatory frameworks.
This involves: “identifying and analysing, among other things, the structural components of DeFi products, services, arrangements, and activities; the roles of each of the participants involved, including their incentives and motivations; how participants engage with the various components and each other; and the roles that centralised crypto-asset platforms and service providers play.”
The IOSCO report says: “Regulators should consider additional approaches to provide important investor, customer and market protections for DeFi market participants, including through their regulation and oversight of traditional financial market participants or centralized crypto-asset platforms involved, directly or indirectly, in DeFi arrangements or activities.
“Given the potential effects of DeFi on TradFi, it is important to be able to monitor and evaluate interlinkages between DeFi and traditional financial markets.”
The report adds: “The regulatory approach should be functionally based to achieve regulatory outcomes for investor protection and market integrity that are the same as, or consistent with, those that are required in traditional financial markets.”