The International Organization of Securities Commissions (IOSCO) published a report that offers a general understanding of decentralized finance, including the areas of potential regulatory concern.
The report aims to provide a general understanding of decentralized finance as well as its features and protocols, including the key areas of potential regulatory concern. It notes that decentralized finance is quickly evolving to mirror conventional financial markets and highlights the need to understand the regulatory implications that arise from decentralized finance. The report notes that lending and borrowing protocols are two of the primary decentralized finance products currently available. The report also notes that understanding the regulatory implications arising from decentralized finance requires analyzing the totality of a decentralized finance ecosystem as it exists currently, its interrelationship with centralized crypto-asset trading platforms and service providers and traditional markets and activities, and how it may continue to develop in the future. Developing a comprehensive understanding includes
- identifying and analyzing, among other things, the structural components of each type of decentralized finance financial product, service, arrangement, and activity
- what aspects of these may be “decentralized” and why
- what are the roles of each of the components and participants involved at each of the different layers or levels, including their incentives and motivations
- how participants engage with the various components and each other
- the roles that centralized crypto-asset trading platforms and service providers play
Many of the financial products, services, arrangements, and activities in decentralized finance mirror, and in some cases overlap with, more traditional securities and derivatives products, services, arrangements, and activities. In some cases, these may be novel to decentralized finance. One primary characteristic of decentralized finance is its peer-to-peer nature and the resulting ability to create alternatives to traditional and centralized financial market infrastructures, products or services, and potentially complicate the application of existing regulatory frameworks to decentralized finance market participants and activities, including those that govern issuers, offerings, products, intermediaries, and trading markets. The report notes that blockchain decentralized finance services are often similar to traditional finance services but, with weaker regulation and increased risks for investors. As decentralized finance continues to expand, both a granular and holistic understanding of the decentralized finance market will improve authorities’ ability to understand the regulatory implications of this emergent market with respect to their own jurisdictions. The report acknowledges that decentralized finance is a continuously evolving area and IOSCO will continue to examine this area and its implications for market regulators. In response to the report, IOSCO has announced the establishment of a new task force that will provide timely and coordinated policy action to address the risks arising from this fast-growing area. IOSCO has also called for comment and input from the public, including crypto-asset market and decentralized finance participants and from any other interested party, on the issues raised in this report as well as on any other matter related to crypto-assets or decentralized finance.
Keywords: International, Banking, Securities, Decentralized Finance, Crypto-Assets, Crypto-Asset Platforms, Lending, Regtech, DeFi, Blockchain, P2P Lending, IOSCO
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