Global securities regulator says governments need to know who runs DeFi protocols

The International Organization of Securities Commissions (IOSCO) published its decentralized finance (DeFi) policy recommendations this week, and it’s advising jurisdictions to figure out who is behind so-called “leaderless” protocols. 

DeFi’s anti-centralized body nature makes regulating the industry a challenge, IOSCO said in its latest report, so identifying “responsible persons” is essential. 

“A regulator should aim to identify the persons and entities of a purported DeFi arrangement that could be subject to its applicable regulatory framework,” the report read. “These responsible person(s) include those exercising control or sufficient influence over a financial product offered, financial service provided or financial activity engaged in (or over products, services and activities that behave like, or have been substituted by investors for, financial products, services and activities) by the DeFi arrangement.”

The recommendation hints at an issue some crypto companies and users have already raised in the US, where DeFi operations have — in the opinion of some — been unfairly treated like individuals. 

In their lawsuit against the US Treasury Department, Secretary Janet Yellen, the Office of Foreign Asset Control (OFAC) and OFAC Director Andrea Gacki, blockchain users have alleged that crypto mixer Tornado Cash is simply a piece of computer code, and therefore cannot qualify as a “foreign national or person.” 

Read more: Tornado Cash arrests spur privacy debate

IOSCO also suggests that members create laws that prevent conflicts of interest and market manipulation.

“Many DeFi arrangements and activities today are being conducted in a manner that presents conflicts of interest,” the report states. “DeFi participants may be acting in roles and capacities that create conflicts of interest.” 

The DeFi proposal comes about a month after the standards organization unveiled its crypto markets regulation recommendations. This policy guidance, which came after a months-long consultation period, suggest regulations should focus on main points of risk in crypto markets, namely market abuse, client asset protection and disclosure requirements. 

IOSCO, whose members represent around 130 jurisdictions globally, releases policy recommendations in an attempt to coordinate how nations respond to new technologies. Consistent regulation is necessary, the agency wrote in its crypto report, in order to reduce regulatory arbitrage. 

Read more: 99% of law enforcement needs more crypto-focused training: Survey

Vastly different crypto laws around the globe also “reduce the ability of jurisdictions to enforce their laws, and depending on the laws of particular jurisdictions, potentially raise the prospect of jurisdictional borders hindering the effectiveness of the authorization and supervision process,” the report added. 

IOSCO recommends that regulators and, when needed, lawmakers share information across borders in order to cut down on criminal activity and potential risks.

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