FIA EPTA Response to IOSCOs Decentralised Finance (DeFi) paper

9 September 2022

In the paper, IOSCO lays out a general overview of the DeFi space, and some of the challenges and risks regulators see. FIA EPTA and its members are becoming part of the DeFi space and are pleased to see the growing interest from policymakers and regulators. One of the key challenges that the IOSCO paper tried to tackle is defining what DeFi is, this is also an issue faced by market participants as there is no general view on DeFi yet. FIA EPTA members believe that the market will benefit from further clarity by regulatory bodies with a global perception. Working jointly with market participants to reduce the current void in regulation and perspective between the market and regulators and policymakers.

FIA EPTA members see a lot of dynamism and potential in the DeFi space. The potential of DeFi to overhaul parts of the financial marketsis exciting, but as identified by IOSCO, there are significant risks that first need to be resolved. Our Members are continuously addressing these risks and engaging with other stakeholders to create simple and transparent solutions. However, we realise this is an ongoing conversation, and we, therefore, look forward to working with IOSCO in the future to address these issues.

- FIA EPTA members believe that the market will benefit from further clarity by regulatory bodies like IOSCO to define a global perception of the definition of DeFi.

- FIA EPTA members believe that the application of the term “front-running” to all forms of MEV and linking such behaviour to fraud may be overly simplistic. It also ignores the particular level of transparency inherent to blockchain technology.

- IOSCO identified two types of Governance risks in the paper; the control of administrative keys and the functioning of protocol governance structures. FIA EPTA members believe that to address these risks, solutions should be based on two core principles: simplicity and transparency. Further, we believe it is also important to ensure that the amount of governance decisions that need to be taken is limited to ensure the success of the protocols. Initiatives, like the Pyth Network Governance structure, could have solutions for these concerns.

- In the paper, IOSCO points out that oracles are a crucial aspect of the operation of a protocol and are also a key aspect of risk. However, Oracles generally have difficulty separating good and bad investors. The protocol should thus not simply penalise disagreement because honest publishers will occasionally diverge from the actual price.

  • EPTA
  • Digital Assets
  • Digital Assets
  • Audio