DeFi

Looking for regulatory guidance on DeFi? You’ve come to the right place!

You’ll find the key policy documents below, as well as some other resources to help you understand DeFi and its legal implications. We also selected the key academic articles on the topic.
 
Official policy documents – supranational:
 
Official policy documents – domestic:

 

Other policy documents:

 

Academic publications

OECD, Why Decentralised Finance (DeFi) Matters and the Policy Implications (Jan. 2022)

  • Definition, drivers, state of DeFi markets, risks & benefits, policy considerations
  • The “growing application of DeFi and its increasing interconnectedness with traditional markets presents an urgent challenge for policy makers seeking to maximise DeFi’s potential efficiencies for financial markets, while managing risks”, according to the report. Risks identified include “excess volatility, unregulated leverage and other forms of regulatory arbitrage, governance-related risks, market manipulation, risk of illicit finance or outright fraud.” It lists the key distinguishing features of DeFi as: (1) non-custodial, (2) self-governed and community-driven and (3) composable.

Financial Stability Board, Assessment of Risks to Financial Stability from Cryptoassets (Feb. 2022)

  • Has a 3- page section on DeFi
  • The general tone sound very much like that in the OECD’s recent DeFi report. Rights attached to governance tokens “could be understood to be analogous to shareholders’ voting rights in traditional finance”. Although DeFi platforms “purport” to rely on governance tokenholders for voting, “in practice, governance may be concentrated, including through the use of committee structures for management purposes with regular meetings held through social media platforms” or individuals associated with the project who hold “disproportionately large portions” of the total token supply. “Without sufficient regulation and market oversight, DeFi and associated platforms, might present risks to financial stability. Some of these risks are becoming apparent, such as concentration risk in terms of protocols and technology used. The sector has already seen numerous operational and cybersecurity incidents, and failures of governance,” the report added.
  • Financial Action Task Force (FATF), Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (Oct. 2021)
    • Section on peer-to-peer transaction (§37-41)
    • Definition of VASP (§55 ff): “A DeFi application (i.e. the software program) is not a VASP under the FATF standards, as the Standards do not apply to underlying software or technology (see paragraph 82 below). However, creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services. This is the case, even if other parties play a role in the service or portions of the process are automated. Owners/operators can often be distinguished by their relationship to the activities being undertaken. For example, there may be control or sufficient influence over assets or over aspects of the service’s protocol, and the existence of an ongoing business relationship between themselves and users, even if this is exercised through a smart contract or in some cases voting protocols. Countries may wish to consider other factors as well, such as whether any party profits from the service or has the ability to set or change parameters to identify the owner/operator of a DeFi arrangement. These are not the only characteristics that may make the owner/operator a VASP, but they are illustrative. Depending on its operation, there
      may
      also be additional VASPs that interact with a DeFi arrangement.” (§67)
    • It seems quite common for DeFi arrangements to call themselves decentralized when they actually include a person with control or sufficient influence, and jurisdictions should apply the VASP definition without respect to selfdescription. Countries should be guided by the principle that the FATF intends to cover natural or legal persons who conduct the financial services covered in the definition as a business.” (§68)

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