Global Security Regulators Release Initial Proposition for Accountability of Decentralized Finance with Intentions of Market Stability

On Sept 7, global securities regulators released their first blueprint for holding participants in "decentralized finance" (DeFi) accountable for their actions and ensuring market stability. DeFi platforms enable users to lend, borrow, and save in digital assets by utilising the blockchain technology that underpins cryptoassets to circumvent traditional financial gatekeepers such as banks and exchanges.

The collapse of crypto exchange FTX and of the Terra USD stablecoin during 2022 showed how shocks in one part of the crypto market can trigger billions of dollars in outflows from DeFI applications, said IOSCO, the global umbrella body for securities watchdogs from across the world. Such events have seen DeFi shrink from about $180 billion in late 2021 to about $40 billion currently, and the sector is also being used for money laundering, IOSCO said.

"There is a common misconception that DeFi is truly decentralized and governed by autonomous code or smart contracts," said Tuang Lee Lim, chair of a fintech task force at IOSCO.

Stakeholders in DeFi and their roles and the organizational, technological, and communication mechanisms they use, tend to mimic those in traditional finance.

"In reality, regardless of the operating model of the DeFi arrangement,' responsible persons' can be identified," Lim explained.

Regulators have little standardized data on DeFI, which is exacerbated by market participants using multiple pseudonymous addresses to conceal their activities, according to IOSCO.

The watchdog has proposed a framework for regulators in the 130 jurisdictions that make up its membership to ensure investor protection and stable markets with DeFi, as well as to identify and manage risks, obtain clear disclosures, and collaborate cross-border to enforce applicable laws.

Regulators should use existing laws or enact new ones as needed to gain a complete picture of DeFI, including the identities of individuals and businesses involved, according to IOSCO.