Global regulators look for means to bring down decentralised finance

Decentralised Finance, (DeFi) represents a financial ecosystem built on blockchain technology. These platforms enable users to engage in a range of financial activities, including lending, borrowing, trading, and saving, all without the need for traditional intermediaries like banks or financial institutions.

DeFi leverages smart contracts to automate and facilitate these operations, providing users with more control over their assets and financial decisions. It has gained significant attention and adoption in recent years, with the promise of greater financial inclusivity and accessibility.

The collapse of crypto exchange FTX and of the Terra USD stablecoin during 2022 showed how one part of the crypto market can trigger billions of dollars in outflows from DeFI applications, said IOSCO, the global umbrella body for securities watchdogs from across the world. Such events have seen DeFi shrink from about $180 billion in late 2021 to about $40 billion currently, and the sector is also being used for money laundering, IOSCO said.

"There is a common misconception that DeFi is truly decentralised and governed by autonomous code or smart contracts," said Tuang Lee Lim, chair of a fintech taskforce at IOSCO. Stakeholders in DeFi, their roles, their organisational, technological and communication mechanisms they use are more or else similar to those in traditional finance.

"In reality, regardless of the operating model of the DeFi arrangement, 'responsible persons' can be identified," Lim said.

The watchdog has proposed a framework for regulators across the 130 jurisdictions covered by its membership to ensure investor protection and stable markets with DeFi, identify and manage risks, obtain clear disclosures and cross-border cooperation to enforce applicable laws.

Regulators should use existing laws or introduce new ones where needed to get a full picture of DeFI, including the identities of people and companies involved, IOSCO said.

A public consultation on the proposals from IOSCO in May to regulate cryptoassets themselves, runs until mid-October before the framework is finalised around the end of 2023.

IOSCO members commit to applying agreed recommendations, and some member countries like the United States have already begun looking at how DeFi fits into existing securities laws.