The International Organization of Securities Commissions (IOSCO), a global body under the umbrella of securities regulators, recently released its policy recommendations for the decentralized finance (DeFi) sector. In this report, IOSCO advises jurisdictions to identify the responsible figures behind DeFi protocols, often considered “leaderless”.
The decentralized and anti-centralized nature of DeFi presents unique challenges for regulation, as highlighted by IOSCO. The report emphasizes the importance of identifying “responsible persons” in DeFi agreements. These persons include those with control or significant influence over the financial products offered, services provided, or financial activities involved in DeFi protocols.
What does this mean for DeFi?
This point of view is particularly relevant in light of recent developments in the United States, where DeFi operations have, in some cases, been treated as individuals. A notorious example is the case of cryptocurrency mixer Tornado Cash, whose users argued that, as a piece of computer code, it could not be classified as a “citizen or foreign person”.
Furthermore, IOSCO suggests that its members develop laws to prevent conflicts of interest and market manipulation within the DeFi ecosystem. The report points to the existence of significant and potential conflicts of interest within many current DeFi arrangements and activities.
This IOSCO proposal follows its recommendations for regulating cryptocurrency markets, published a month earlier. This guidance focuses on key risk points in cryptocurrency markets, including market abuse, customer asset protection, and disclosure requirements.
How does IOSCO behave in this situation?
IOSCO, representing around 130 global jurisdictions, seeks to coordinate the international response to new technologies through its policy recommendations. The agency emphasizes the need for consistent regulation to minimize regulatory arbitrage and improve the effectiveness of law enforcement across jurisdictions.
The report also suggests that regulators and policymakers share information across borders to combat criminal activity and mitigate potential risks. Differences in crypto laws around the world can reduce the ability of jurisdictions to enforce their laws and, depending on the specific laws, can increase jurisdictional challenges.
Therefore, IOSCO seeks to balance innovation in the DeFi sector with the need to protect investors and maintain market integrity.
The views and opinions expressed by the author, or anyone mentioned in this article, are for informational purposes only and do not constitute financial, investment or other advice. Investing or trading cryptocurrencies carries a risk of financial loss.