Member Article

The International Organization of Securities Commissions (IOSCO) has published its policy recommendations for decentralised finance (DeFi) as a consultation paper. Responses are due by 19 October 2023.

The consultation itself is exceedingly detailed – unusual and welcome from ISOCO – and has a theme running through it which boils down simply to its recommendation that regulators:

1. understand DeFi at a much more granular level;
2. view DeFi products and services through the lens of traditional finance products and services; and
3. determine whether each DeFi product and service fits within existing financial services rules or requires new rules which have the same outcome as traditional rules.

This may not sound very ground-breaking, however, as a result, the recommendations cover issues which often are overlooked in DeFi, such as:

• how does one identify a “responsible person” for DeFi products and services (and what one does once he/she is identified;
• the “devil being in the detail”;
• how terms such as “DEX” and “smart contracts” are umbrella terms and mean different things to different people (and attempts to break them down);
• whether smart contracts are self-clearing; and
• the cross-border element of DeFi (i.e. the regulatory arbitrage opportunities).

The direction of travel appears to be that DeFi is brought within the existing regulatory perimeter, whether by classifying them under existing products and services or by classifying them as something new but applying the existing rules in a way which produces an equivalent outcome.

Ironically, given point 1 above, how successful IOSCO will be in seeing regulators put into place its recommendations (post-consultation) will depend on the “detail” of any rules adopted by regulators and how much those rules diverge between regulators. I have not concluded that if a certain type of cryptoasset is characterised as a commodity in one jurisdiction and a security in another or whether a DEX is characterised as a DCM in one jurisdiction and an equities venue in another will make “equivalent outcomes” impossible. However, I do imagine it will not help achieve that.

Please get in touch if you would like to respond or to discuss the recommendations further.

 

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