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Global regulators seek to crack down on decentralised finance

Date: 07 September, 2023

In a significant move, global securities regulators have unveiled a blueprint aimed at holding participants in “decentralized finance” (DeFi) accountable for their actions and ensuring market stability. DeFi platforms, leveraging blockchain technology, enable users to engage in activities like lending, borrowing, and saving in digital assets, circumventing traditional financial gatekeepers such as banks and exchanges.

The collapse of the FTX crypto exchange and the Terra USD stablecoin in 2022 demonstrated how shocks in one part of the crypto market could trigger substantial outflows from DeFi applications, leading to a reduction in DeFi from approximately $180 billion in late 2021 to about $40 billion presently. Additionally, the sector has been linked to money laundering concerns.

IOSCO, the global umbrella body for securities regulators, highlighted a common misconception that DeFi is entirely decentralized, emphasizing that responsible individuals can be identified regardless of the operating model. Stakeholders and their roles in DeFi often mirror those in traditional finance.

IOSCO acknowledged the challenge of limited standardized data on DeFi, exacerbated by participants using multiple pseudonymous addresses to obscure their activities. To address these issues, the watchdog has proposed a framework for regulators across its 130-member jurisdictions. The framework aims to ensure investor protection, maintain stable markets in the DeFi space, identify and manage risks, promote clear disclosures, and encourage cross-border cooperation to enforce applicable laws.

Key Points:

  • Global securities regulators have introduced a blueprint to hold participants in decentralized finance (DeFi) accountable and ensure market stability.
  • DeFi platforms utilize blockchain technology, allowing users to engage in various financial activities without relying on traditional gatekeepers like banks and exchanges.
  • The 2022 collapse of the FTX crypto exchange and Terra USD stablecoin revealed how shocks in the crypto market could lead to substantial outflows from DeFi, reducing its value from $180 billion in late 2021 to around $40 billion.
  • DeFi has been associated with money laundering concerns, prompting the need for regulatory intervention.
  • IOSCO, the global umbrella body for securities regulators, dispels the misconception that DeFi is entirely decentralized, emphasizing the identification of responsible individuals regardless of the operating model.
  • Stakeholders and roles in DeFi often mirror those in traditional finance, challenging the notion of complete decentralization.
  • Limited standardized data on DeFi poses a challenge, exacerbated by participants using multiple pseudonymous addresses to obscure activities.
  • IOSCO proposes a framework for regulators in its 130-member jurisdictions, focusing on investor protection, stable DeFi markets, risk management, clear disclosures, and cross-border cooperation to enforce applicable laws.
References:

https://www.reuters.com/technology/global-regulators-seek-crack-down-decentralised-finance-2023-09-07/

https://money.usnews.com/investing/news/articles/2023-09-07/global-regulators-seek-to-crack-down-on-decentralised-finance

 

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