Proposed Global Policy Recommendations for Decentralized Finance

On September 7, 2023, the International Organisation of Securities Commissions launched a consultation on proposed policy recommendations on market integrity and investor protection issues in decentralized finance (DeFi). IOSCO is proposing that the final recommendations, which it aims to finalize before the end of 2023, will help IOSCO members to establish compliant markets. Responses to the consultation may be submitted until October 19, 2023.

In summary, IOSCO's proposed recommendations are:

1. A regulator should analyze DeFi products, services, arrangements, and activities occurring or located within its jurisdiction and consider whether to apply existing or new requirements following the principle of "same activity, same risk, same regulatory outcome."
2. A regulator should aim to identify the natural persons and entities of a DeFi arrangement or activity that could be subject to its applicable regulatory framework, including individuals with control over the design and maintenance of the DeFi arrangement and those individuals, such as developers or foundations (as proposed in ADGM), exercising control or sufficient influence over a DeFi arrangement or activity.
3. A regulator should regulate the risks arising from DeFi products, services, arrangements, and activities in line with the IOSCO Standards so as to achieve regulatory outcomes for investor protection and market integrity similar to those that are required in traditional financial markets.
4. A regulator should require providers of DeFi products and services to identify, manage, and mitigate conflicts of interest. A regulator should consider whether measures, such as legal disaggregation and separate regulation of certain activities and functions, are warranted.
5. A regulator should require providers of DeFi products and services to identify, manage, and mitigate material risks, including operational and technology risks.
6. A regulator should require accurate disclosure to users and investors of comprehensive and clear information material to the products and services offered.
7. A regulator should apply authorization, inspection, investigation, surveillance, and enforcement powers to DeFi products, services, arrangements, and activities.
8. A regulator should have the ability to cooperate and share information with regulators and relevant authorities in other jurisdictions, including through cooperation and information sharing arrangements.
9. A regulator should consider and assess the risks posed by the interconnections among DeFi arrangements, the broader crypto-asset market, and traditional financial markets.

IOSCO consulted earlier this year on recommendations for crypto and digital asset markets. The final recommendations are expected in Q4 2023.

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