Decentralized Finance (DeFi): IOSCO's Global Policy Guidelines for Securities Regulation

Embracing a decentralized autonomous organization (DAO) structure does not exempt entities from regulatory obligations, asserts the International Organization of Securities Commissions (IOSCO), a prominent global authority on securities markets regulation. IOSCO, representing oversight for over 95% of the world's securities markets through its members, has recently released comprehensive guidance on managing decentralized finance (DeFi). This move follows closely on the heels of its recommendations for regulating cryptocurrency markets.

DeFi, characterized by its decentralized nature and absence of a central governing authority, presents a distinctive challenge for regulators worldwide. IOSCO, in a September report, stressed the imperative for governments to pinpoint those accountable for inventive financial applications and subject them to regulatory measures akin to those governing traditional finance.

IOSCO's guidance underscores the shared economic functions and activities between DeFi and conventional financial markets, contending that many existing international policies, standards, and regulatory frameworks are relevant to decentralized finance. In instances where existing regulations fall short, IOSCO advocates for their modification to ensure effective oversight.

The regulatory guidance zeroes in on critical facets of DeFi, encompassing the identification of responsible individuals, the establishment of transparent disclosure requirements, and the enforcement of industry-specific laws. IOSCO defines responsible individuals as those who "exercise control or sufficient influence over a financial product offered, financial service provided, or financial activity engaged in by the DeFi arrangement." This broad definition encompasses a spectrum of actors participating in DeFi activities.

Crucially, IOSCO clarifies that opting for a DAO structure, as opposed to traditional incorporation, does not release individuals and entities from their regulatory obligations. Irrespective of the organizational framework, nomenclature, or technologies employed, IOSCO underscores that those involved in offering financial products and services, as well as engaging in financial activities, must adhere to relevant laws.

The guidance emphasizes the necessity of adapting existing regulatory frameworks to accommodate the distinctive features of DeFi while ensuring the industry operates within established legal parameters. As the DeFi landscape undergoes continuous transformation, regulators globally are challenged to navigate the intricacies of this decentralized financial ecosystem while safeguarding investor interests and maintaining market integrity. IOSCO's recommendations serve as a guiding framework for jurisdictions to confront the regulatory complexities presented by DeFi, facilitating the seamless integration of this innovative sector into the broader financial regulatory landscape.

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