Governments should figure out who’s responsible for supposedly decentralized finance applications and regulate them just like normal financial market players, the International Organization of Securities Commissions (IOSCO) said in a report published Thursday.
The global standard setter, whose members include bodies like the U.S. Securities and Exchange Commission and U.K. Financial Conduct Authority, worries innovative financial applications could be easily manipulated – and appears skeptical about the premise that there’s nobody in control to pin legal obligations on.
In principle, decentralized finance (DeFi) – allowing lending or trading to take place using algorithms, tokens and decentralized autonomous organizations (DAOs) – turn on their head many of the premises of regular financial regulation, which relies on finding a central person or company responsible for keeping markets fair and protecting investors.
But officials at IOSCO appear to share the view that the supposed decentralization of DeFi is an illusion, and are calling on national regulators to act.
“There is a common misconception that DeFi is truly decentralized and governed by autonomous code or smart contracts,” Tuang Lee Lim, Chair of IOSCO’s Board-Level Fintech Task Force, said in a statement. “In reality, regardless of the operating model of the DeFi arrangement, 'responsible persons' can be identified.”
Recommendations published by IOSCO say national regulators should identify who’s really in charge, and given them obligations to uphold investor protection and market integrity on a par with what’s done in traditional finance (TradFi).
Depending on exactly how existing TradFi rules are written, DeFi may be noncompliant, or simply outside of scope – but officials warn that pseudonymity and opaque governance may make it harder to identify collusion or conflicts of interest, allowing risks like front-running, hacks, or excessive leverage.
“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,” the IOSCO report said.
The report comes hours after the Financial Stability Board and International Monetary Fund jointly called for comprehensive, global approach to crypto regulation, as leaders from the world’s twenty biggest economies gather for a summit in New Delhi, India.
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