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IOSCO explains how Decentralised Finance is cloning Financial Markets

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Madrid, 24 March 2022

IOSCO has today published a detailed report setting out how decentralised finance (“DeFi”) is quickly evolving to mirror conventional financial markets.

Ashley Alder, IOSCO Chair and Chief Executive Officer of the Securities and Futures Commission (SFC) of Hong Kong, said: “DeFi is a novel and fast-growing area of financial services, and this report outlines key areas of concern for IOSCO.”

The IOSCO report offers a comprehensive review of the fast-evolving DeFi market, its new products, services and principal participants. It identifies some products and services which are novel to DeFi. But most of the new services which are emerging replicate more traditional financial services and activities, but with weaker regulation and increased risks for investors.

The report casts doubt on a key claim of DeFi innovators that it is a peer-to-peer marketplace with no centralised insiders in control.  By looking in detail at how DeFi works, it identifies central actors who, it concludes, often retain control – for example, through the distribution of “governance tokens”. It also highlights the important role played by centralised trading platforms who often face substantial conflicts of interest.

In response to the report, IOSCO has also announced the establishment of a new task force.  Tuang Lee Lim, Assistant Managing Director (Capital Markets) of the Monetary Authority of Singapore (MAS) and chair of this new task force said: “The report provides evidence of both the potential opportunities as well as significant risks that DeFi can bring to investors and markets. IOSCO’s decision to establish the task force signifies our members’ resolve to take timely and coordinated policy action to appropriately address the risks arising from this fast-growing area. I look forward to working closely with experts and colleagues on the task force in charting its work ahead.”

IOSCO has called for comment and input from the public, including crypto-asset market and DeFi participants and from any other interested party, on the issues raised in its DeFi report, as well as on any other crypto-asset or DeFi related matters. Comments may be submitted to DeFi@iosco.org.

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