IOSCO establishes global approach to address risks in Decentralised Finance

IOSCO, the global standard setter for securities markets, has recently issued a Consultation Report consisting of nine policy recommendations. These recommendations are aimed at addressing market integrity and investor protection concerns arising from the growing field of DeFi.
DeFi encompasses various financial products, services, and activities that utilize distributed ledger or blockchain technologies, including smart contracts. It seeks to decentralize traditional financial ecosystems and reduce the reliance on traditional intermediaries. While DeFi offers innovation potential and efficiency improvements, IOSCO’s primary focus is on analyzing and responding to market integrity and investor protection issues stemming from DeFi’s technological advancements.
The nine policy recommendations are designed to ensure consistency in regulatory frameworks and oversight across member jurisdictions. They follow a principles-based and outcomes-focused approach and are applicable to DeFi products, services, arrangements, and activities. IOSCO’s objective is to promote consistency in the regulation and oversight of crypto-asset activities, including addressing cross-border challenges and regulatory arbitrage.
The recommendations emphasize cooperation among regulators to address cross-border challenges and enforcement issues related to DeFi activities conducted across multiple jurisdictions. While these recommendations are not directly addressed to market participants, they are encouraged to adhere to the proposed guidelines.
IOSCO’s new report builds on its 2022 Decentralized Finance Report, emphasizing the importance of understanding the DeFi market, its participants, and the regulatory obligations that apply. It underscores the need for regulatory frameworks to ensure investor protection and market integrity in both DeFi and traditional financial markets.
The report assists global regulators in understanding why DeFi presents significant risks, what products and services it offers, who is involved, and how to apply IOSCO’s Objectives and Principles for Securities Regulation and relevant standards and recommendations to DeFi.
The recommendations cover six key areas: understanding DeFi arrangements and structures, achieving common regulatory outcomes, identifying and managing key risks, ensuring clear disclosures, enforcing applicable laws, and promoting cross-border cooperation.
IOSCO has initiated a public consultation on these nine recommendations, with the aim of finalizing them by the end of 2023 in line with its Crypto-Asset Roadmap and in conjunction with its Crypto and Digital Assets (CDA) recommendations. Stakeholders are encouraged to provide feedback on the consultation paper by 19 October 2023.