IOSCO sets out nine policy recommendations addressing issues tied to DeFi

The International Organization of Securities Commissions (IOSCO), the international securities regulator, recently issued nine policy recommendations specifically designed to address issues tied to the DeFi sector. The recommendations primarily target the integrity of the market, as well as investor protection concerns.

IOSCO’s recommendations for regulating DeFi

According to IOSCO, the recommendations were designed to enable and support increased consistency of regulatory frameworks and oversight for the DeFi sector, and they will be applied in all of the regulator’s jurisdictions.

Furthermore, they cover six different areas tied to the sector. Those include understanding the arrangements and structures of DeFi; cross-border cooperation; achieving common standards of regulatory outcomes; enforcement of applicable laws; clear, accurate, and comprehensive disclosures; and lastly, identification and management of some of the key risks of the sector.

The new recommendations also complement others that were issued last month, which primarily deal with cryptocurrencies and the digital asset markets in general.

Commenting on the new recommendations, IOSCO’s chair, Jean-Paul Servais, stated that the risks tied to the crypto-asset markets are quite real. He noted that IOSCO has been tackling them in a coordinated manner, trying to achieve consistent implementation of the new recommendations across the entire membership. IOSCO sees this as the best way to go about protecting investors on a global scale.

By releasing the recommendations, the standard setter for securities markets regulation as managed to provide guidance for around 130 jurisdictions. The organization’s members regulate over 95% of the global securities markets, suggesting that its recommendations will truly be a game-changer for the global DeFi sector.

Existing laws can be used to regulate much of the DeFi sector, says IOSCO

Regulators have attempted to tackle DeFi in the past, but such attempts have mostly been unsuccessful, and anyone who tried it has struggled significantly. The issue is that the sector lacks a central body that would be subject to supervision.

IOSCO’s approach, as it revealed in its September report, was to instruct governments to identify who is responsible for innovative financial applications and regulate them in the same way as they would traditional finance. The regulator noted that the economic functions and activities of DeFi are quite similar to those of traditional financial markets.

With that being the case, many existing international standards, policies, and jurisdictional regulatory frameworks can be applied to DeFi activities, as well. Those mechanisms can then be used to govern the evasive sector. As for areas where the existing rules do not apply, they can and should be modified to fit the situation, as IOSCO instructed.

“Regardless of the labels, organizational forms, or technologies used, persons and entities who offer or provide financial products and services and engage in financial activities should be subject to applicable laws.”