Regulating DeFi: IOSCO announces recommendations for securities-like treatment - Identity verification of protocol administrators should be ensured.

The International Organization of Securities Commissions (IOSCO) recently announced regulatory recommendations regarding DeFi, stating that regulatory authorities should strive to identify the responsible individuals or entities behind various protocols on the blockchain. They should also prevent conflicts of interest and market manipulation within DeFi. It is important for countries to maintain information sharing and ensure consistency with securities market regulatory approaches.

IOSCO proposes regulatory recommendations for cryptocurrencies to establish global standards for crypto service providers.

IOSCO Publishes Policy Recommendations on DeFi

The final report released by IOSCO reveals its policy recommendations on DeFi, following the regulatory recommendations for cryptocurrency service providers introduced in May this year after a 7-month consultation period.

The report includes 9 policy recommendations for DeFi risk management, focusing primarily on current risks in the crypto market, such as market manipulation, user asset protection, and disclosure requirements.

Overall, the content is similar to the aforementioned regulatory recommendations for cryptocurrencies, but it includes some key summaries and additional perspectives from industry professionals.

Note: IOSCO provides basic standards to follow, not global uniform regulations.

IOSCO: Decentralized Operations Do Not Evade Responsibility and Punishment

Firstly, IOSCO believes that regulatory authorities in each country should strive to identify and confirm the "responsible persons or entities" behind each DeFi protocol:

Regardless of whether the management or decision-making structure is decentralized, there must be a regulated entity responsible for comprehensive regulation of product planning, service provision, and trading activities.

Lawyer Mr. Lawyer agrees with this statement:

If DAO is operating an exchange, regulatory authorities will look for "specific individuals" to hold accountable. Decentralization may make scrutiny more difficult, but it does not prevent punishment itself.

However, in previous lawsuits where users sued the U.S. Department of the Treasury and the Office of Foreign Assets Control (OFAC) over alleged overreach in the case of Tonado Cash, different views were expressed :

Cryptocurrency mixers are just computer code and cannot be considered "individuals or foreigners," and therefore do not fall within the enforcement scope of OFAC.

"Same Activities, Same Risks, Same Regulatory Approaches"

Interestingly, several key phrases are repeatedly mentioned in Recommendations 1 and 3:

The International Organization of Securities Commissions (IOSCO) seeks consistency in regulatory approaches between the cryptocurrency asset market and the securities market, and encourages adherence to the principles of "same activities, same risks, same regulatory approaches, and outcomes."

The term "same" appears numerous times in the report, clearly indicating that IOSCO emphasizes the need for similar or consistent regulations for cryptocurrency assets and securities.

Upon closer examination, it can be seen that the working group of the report is led by personnel from the U.S. Securities and Exchange Commission (SEC), which seems to make sense.

Emphasizing the Importance of Cross-Border Cooperation

The report also provides detailed explanations of various ways in which the DeFi industry or market participants evade regulation and calls for regulatory authorities to assess whether they have sufficient power, resources, and tools to facilitate investigations and take action.

At the same time, IOSCO emphasizes the importance of cross-border information sharing among regulatory authorities to reduce criminal activities and potential risks.

Lawyer: Some DeFi Products Should Not Be Hindered by Securities Regulation

Finally, the aforementioned lawyer, Mr. Lawyer, raises some questions and concerns about the report, including the broad definition of terms and attempts to conflate DeFi and TradeFi:

IOSCO uses very broad terms in what it believes should be within the scope of regulation. However, even if there is something or a mechanism in AMMs or DEXs, it does not necessarily mean that the product is a security or requires securities regulation.

In addition, IOSCO suggests that regulatory authorities consider decentralized exchanges (DEXs) and smart contracts as roles in clearing and settlement, even though such wording is based on TradeFi, which relies on intermediary systems. However, cryptocurrencies were invented to avoid such intermediaries:

IOSCO may not yet recognize the differences between TradFi and DeFi in terms of technology and practical significance.