DeFi and DAOs Caught in The Crosshairs in 2024
Regulations are coming as "same risk, same regulation" hits.
DeFi is in for an exciting 2024 as regulators come after it with “same activity, same risk, same regulation approach.
Worst of all, new standards SLAUGHTER the concept of an autonomous organization. In short, Digital Autonomous Organizations (DAOs) just had their wings clipped! But who is doing the clipping?
IOSCO is the leading international policy forum for securities regulators and is the global standard-setter for securities regulation. IOSCO helps members figure out how to regulate securities markets and holds over 95% of the world's securities markets in some 130 jurisdictions.
Can members differ in their regulatory approach? Yes, but not by much, so these recommendations cut DeFi to the core!
👉TAKEAWAYS:
IOSCO has 9 recommendations, but Nos. 1 & 2 are the most important. And above all it is No. 2 on responsible persons that will wreak terror 😱 in the DeFi world:
Analyze DeFi Products, Services, Activities, and Arrangements to Assess Regulatory Responses
A regulator should analyze DeFi products, services, activities, and arrangements….. in accordance with the principle of “same activity, same risk, same regulation/regulatory outcome.”
Identify Responsible Persons
“A regulator should aim to identify the persons and entities of a purported DeFi arrangement that could be subject to its applicable regulatory framework (Responsible Person(s)).”
“Some industry participants have asserted that if something is decentralized, it is not, or cannot be, regulated. “
“However, regardless of a governance structure or how “decentralized” the decisionmaking is, there is usually a Responsible Person(s) that controls, or sufficiently influences, the offer of products, provision of services, or engagement in activities.”
“For example, a group of persons or an entity or entities using governance/voting rights or organized as a DAO may be acting collectively to direct themselves or others to make changes to a financial product, service, or activity. In some cases, more than one person or entity may be a Responsible Person.”
Achieve Common Standards of Regulatory Outcomes
Require Identification and Addressing of Conflicts of Interest
Require Identification and Addressing of Material Risks, Including Operational and Technology Risks
Require Clear, Accurate, and Comprehensive Disclosures
Enforce Applicable Laws
Promote Cross-Border Cooperation and Information Sharing
Understand and Assess Interconnections Among the DeFi Market, the Broader Crypto-Asset Market, and Traditional Financial Markets
👊STRAIGHT TALK👊
DeFi is coming under the regulatory hammer in 2024,, and they can do nothing to stop it.
I do give DeFi and many of its companies credit for their hubris. How many institutions do you know that carry out financial transactions and try to claim that financial regulations don’t apply to them because an autonomous machine is doing the work?
So here's what's going to happen. DeFi will all be brought into "same risk, same regulation" frameworks in the next few years. This means that they will still be able to operate but must be regulated and lose their Wild West reputation. Many will fold.
While I’m no lawyer, the basic concept that an individual or company is responsible for an entity's actions goes back to the Romans. How DAOs thought they could provide public services without a responsible entity seems a stretch. It’s over.
IOSCO’s recommendation makes it very clear that they’ll come after all those with voting rights in the DAO. So good luck claiming that you’re DAO and can’t be held responsible when something comes off the rails; you will be, and that’s a step in the right direction.
IOSCO is not unique in this approach; in the recent stablecoin report by the Bank of England, they also came after DAOs with a similar requirement for a responsible entity. See below:
This will impact many decentralized services, from exchanges (DEX) to digital lenders and aggregators. Some may have responsible parties, and some may not.
The message is clear: innovate all you want, but someone has to be responsible, and regulations apply to you, too.
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