Pioneering DeFi Regulatory Blueprint Unveiled by IOSCO

IOSCO proposes nine policy recommendations for uniform regulatory oversight of DeFi.

The International Organization of Securities Commissions (IOSCO), the global regulatory authority supervising securities and financial markets, has introduced nine policy recommendations to promote consistent regulatory oversight across jurisdictions, specifically targeting the dynamic landscape of decentralized finance (DeFi).

In an effort to fortify the regulatory structure around decentralized finance, IOSCO’s recent recommendations encompass a range of fundamental principles. These principles underscore the significance of regulatory uniformity and compliance with relevant laws.

A key recommendation, “Rule 7,” underscores the need to “enforce applicable laws.” While this may appear to be a basic statement, the real value is found in the detailed guidance that accompanies each rule. The guidance for Rule 7 details various strategies that DeFi and other market participants might use to evade regulatory responsibilities. It encourages regulators to examine their existing powers, tools, and resources to ensure they can effectively supervise these innovative financial ecosystems.

Moreover, IOSCO seeks to promote uniformity in the regulatory approach to crypto-asset and traditional securities markets. The principle guiding this effort is the consistent application of “same activity, same risk, same regulation/regulatory outcome” across these sectors.

IOSCO’s recommendations challenge a common misconception in the crypto and DeFi space: that decentralization makes entities immune to regulation. In Recommendation 2, which addresses the need to “identify responsible persons,” the report counters this belief. It asserts that irrespective of the governance structure or level of decentralization, a “Responsible Person(s)” usually wields control or exerts significant influence over product offerings, service provisions, or activities within these ecosystems.

These DeFi guidelines expand upon IOSCO's prior directives for crypto and digital assets released in November.

The organization has also released a guidance note that explains how both sets of recommendations should be applied simultaneously, depending on the level of decentralization within the regulated entity. This synergy ensures that regulatory measures can adapt to the changing nature of the financial landscape.

With the publication of these comprehensive DeFi policy recommendations, IOSCO is set to shift its focus towards proactive monitoring, building regulatory capacity, and providing technical assistance to its member authorities.

Currently, IOSCO’s membership includes over 130 regulatory authorities, collectively responsible for supervising 95% of the world’s financial markets. IOSCO’s decision to pivot towards these activities highlights its commitment to ensuring that regulatory bodies worldwide are adequately prepared to address the challenges posed by the rapidly expanding DeFi ecosystem. This proactive approach aims to preserve the integrity of financial markets while protecting the interests of investors and stakeholders.