Global Securities Regulator IOSCO Issues DeFi Policy Recommendations

The standards setter for securities markets regulation worldwide has provided guidance for handling decentralized finance (DeFi) as its members, which represent some 130 jurisdictions, consider ways to supervise the industry.

The International Organization of Securities Commissions (IOSCO), whose members regulate over 95% of the world's securities markets, published its policy recommendations for decentralized finance (DeFi) on Tuesday, just a month after it published recommendations for regulating crypto markets.

Regulators have struggled to tackle DeFi, which, in theory, lacks a central body that could be subject to supervision. But IOSCO, in a September report, told governments to find out who's responsible for innovative financial applications and regulate them as they would traditional finance.

"Given the similar economic functions and activities of DeFi and traditional financial markets, many existing international policies, standards, and jurisdictional regulatory frameworks are applicable to those DeFi activities and those mechanisms that govern them," the regulator said.

In cases where existing rules don't apply, they should be modified to do so, IOSCO said. The guidance on DeFI covers how to identify the people responsible, how to set clear disclosure requirements and how to enforce laws.

Responsible persons include anyone "exercising control or sufficient influence over a financial product offered, financial service provided, or financial activity engaged in (or over products, services, and activities that behave like, or have been substituted by investors for, financial products, services, and activities) by the DeFi arrangement."

Therefore, operating as a decentralized autonomous organization (DAO) rather than incorporating does not "abdicate these persons and entities of their regulatory responsibilities," IOSCO said. "Regardless of the labels, organizational forms, or technologies used, persons and entities who offer or provide financial products and services and engage in financial activities should be subject to applicable laws."