Global regulators seek to crack down on decentralised finance

investing.com:

By Huw Jones

LONDON (Reuters) — Global securities regulators set out on Thursday their first blueprint to make participants in «decentralised finance» (DeFi)accountable for their actions and safeguard market stability.

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 moneylaundering, IOSCO said.

«There is a common misconception that DeFi is truly decentralised 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 standardised 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