Deciphering DeFi Accountability: Global Securities Authority Calls for Oversight

The International Organization of Securities Commissions (IOSCO) has raised concerns regarding the potential hazards decentralized financial applications may present to both investors and markets. In a recently issued report, IOSCO, an organization that counts influential entities like the U.S. Securities and Exchange Commission and the U.K. Financial Conduct Authority among its members, has urged governments to establish accountability for purportedly decentralized financial applications. They propose subjecting these applications to regulatory scrutiny akin to that imposed on traditional financial market participants.

The landscape of decentralized finance (DeFi) is fundamentally reshaping the underpinnings of standard financial regulation, leaning heavily on algorithms, tokens, and decentralized autonomous organizations (DAOs). Despite this shift, IOSCO disputes the notion that there is no central entity to assume legal responsibility. The organization argues that the perceived decentralization of DeFi may be more apparent than actual, urging national regulators to take a more assertive stance.

According to Tuang Lee Lim, Chair of IOSCO’s Board-Level Fintech Task Force, there exists a pervasive misconception that DeFi operates in a genuinely decentralized manner and is exclusively governed by autonomous code or smart contracts. Lim posits that, in reality, regardless of the operational framework of the DeFi arrangement, it is possible to pinpoint "responsible individuals."

IOSCO's recommendations advocate for national regulators to identify the genuine decision-makers and impose obligations on them, ensuring both investor protection and market integrity. This aligns with the standards upheld in traditional finance (TradFi). Depending on the particulars of existing TradFi regulations, DeFi may be deemed noncompliant or potentially lie outside their purview. However, officials caution that the pseudonymous nature and opaque governance of DeFi may complicate efforts to uncover collusion or conflicts of interest, potentially exposing risks such as front-running, hacks, or undue leveraging.

The IOSCO report underscores the necessity for a functionally driven regulatory approach, one that yields outcomes for both investor protection and market integrity in line with the requirements of conventional financial markets. This report arrives concurrently with a unified call from the Financial Stability Board and the International Monetary Fund for a comprehensive, globally cohesive approach to cryptocurrency regulation. This call coincides with a summit gathering leaders from the world's twenty leading economies in New Delhi, India.