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DeFi platforms allow users to lend, borrow and save in digital
assets, using the blockchain technology that underpins
cryptoassets to bypass the traditional gatekeepers of finance
such as banks and exchanges.
The collapse of crypto exchange FTX and of the Terra USD
stablecoin during 2022 showed how shocks in one part of the
crypto market can trigger billions of dollars in outflows from
DeFI applications, said IOSCO, the global umbrella body for
securities watchdogs from across the world.
Such events have seen DeFi shrink from about $180 billion in
late 2021 to about $40 billion currently, and the sector is also
being used for money laundering, IOSCO said.
"There is a common misconception that DeFi is truly
decentralized and governed by autonomous code or smart
contracts," said Tuang Lee Lim, chair of a fintech taskforce at
IOSCO.
Stakeholders in DeFi and their roles, and the organizational,
technological, and communication mechanisms they use, tend to
mimic those in traditional finance.
"In reality, regardless of the operating model of the DeFi
arrangement, 'responsible persons' can be identified," Lim said.
Regulators have little standardized data on DeFI, a situation
made worse by market participants using multiple pseudonymous
addresses to obfuscate their activities, IOSCO said.
The watchdog has proposed a framework for regulators across the
130 jurisdictions covered by its membership to ensure investor
protection and stable markets with DeFi, identify and manage
risks, obtain clear disclosures and cross-border cooperation to
enforce applicable laws.
Regulators should use existing laws or introduce new ones where
needed to get a full picture of DeFI, including the identities
of people and companies involved, IOSCO said.
A public consultation on the proposals, which dovetail with
proposals from IOSCO in May to regulate cryptoassets themselves,
runs until mid-October before the framework is finalized around
the end of 2023.
IOSCO members commit to applying agreed recommendations, and
some member countries like the United States have already begun
looking at how DeFi fits into existing securities laws.
(Reporting by Huw Jones; Editing by Frances Kerry)
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