DECENTRALISED finance (DeFi) arrangements and activities should be regulated in a manner consistent with the aim of promoting investor protection and preventing the same types of misconduct and fraud manipulative practices.
That’s according to Valerie Szczepanik, director of the strategic hub for innovation and financial technology, US Securities and Exchange Commission (SEC).
For this reason, the global securities watchdog, International Organization of Securities Commissions (Iosco) on Thursday (Sep 7) launched a consultation paper outlining nine recommendations to address market integrity and investor protection concerns arising from DeFi.
These include identifying persons responsible for providing DeFi services, achieving common standards for regulatory outcomes similar to those seen in traditional financial markets, among others.
One of the problems the report outlined is the fact that though DeFi service providers and products often involve the use of smart contracts, or automated execution systems without the need for a third party, these are usually built by specific individuals, who may have control or access to the systems without it being known to the customer.
The watchdog also noted a rising number of hacks in recent times, leading to large losses borne by customers who are unaware of such risks.
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“There is a common misconception that DeFi is truly decentralised and governed by autonomous code or smart contracts,” said Lim Tuang Lee, assistant managing director of capital markets at the Monetary Authority of Singapore. Lim is also the chair of the Iosco Fintech Task Force.
“In reality, regardless of the operating model of the DeFi arrangement, ‘responsible persons’ can be identified.
“Our recommendations are therefore predicated on the need to identify these persons, whether legal or natural, who should bear responsibility for upholding investor protection and market integrity,” he added.
The consultation is complementary to an earlier one published by Iosco in May this year, to help toughen up standards for crypto service providers after a string of industry blow-ups in the past year, notably crypto exchange FTX.
But while major centralised exchanges like Binance have been under the watchful eye of regulators everywhere, much less has been said about DeFi, despite a series of breaches this year, including market maker Wintermute’s US$160 million hack.
The paper thus seeks to address these concerns and at the same time, “support greater consistency of regulatory frameworks and oversight across member jurisdictions” of Iosco, said Jean-Paul Servais, Iosco board chair.
The committee is currently seeking feedback on the policy recommendations outlined and aims to finalise them by the end of the year.
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