The IIF has responded to the International Organization of Securities Commissions’ (IOSCO’s) consultation report on policy recommendations for Decentralized Finance (DeFi). In line with previous consultations, the IIF agrees with the principle of “same risk, same regulatory outcome” and advocates for a clearer definition of DeFi that does not create too wide a regulatory net by covering asset classes or activities that are properly outside the scope of financial market regulation. The IIF raises the concern that the current approach may result in a binary process by which an organization is either considered centralized or decentralized, leading to unintended consequences that may follow from differences in interpretation and/or implementation across jurisdictions and make it more difficult for regulated financial institutions to innovate and work with developers and permissionless networks.

The IIF and its members make the following observations on articulation and scope of IOSCO’s Recommendations:

• The IIF agrees with the principle of “same risk, same regulatory outcome” and would encourage IOSCO and its member regulators to apply it by requiring DeFi organizations to achieve the same outcomes intended by existing regulations, but not necessarily via the methods currently used to comply with existing regulations. IOSCO members should be encouraged to allow DeFi operations to explore highly automated or novel methods of delivering the same regulatory outcomes, consistent with the principles of safety and soundness expected of regulated financial institutions.
• The mapping exercise conducted by IOSCO matches DeFi activities with existing financial services counterparts to highlight similar risks posed. The combination of activities permitted within DeFi might also be appropriately considered as standalone products as the effects and risks of the combination of activities need to be accounted for, over and above the risks posed in traditional finance.
• Conflicts of interest require attention. By design, many or even most participants in a DeFi protocol have an “interest” in the protocol by virtue of staking. The implications of this should be evaluated, as well as the most appropriate disclosure methods appropriate for retail and institutional users.
• At present, DeFi lacks sufficient accountability for sanctions compliance. Regulatory approaches today should ideally aim to ensure accountability and market integrity while simultaneously supporting the ability of technological solutions to be developed tomorrow for the long-term betterment of the industry.

This comment letter continues the close engagement of the IIF with central banks, regulators, and global standard-setting bodies on regulatory developments surrounding decentralized finance.