- Regulators, including the Financial Stability Board, IOSCO and the European Commission, are looking to adopt policy recommendations on DeFi this year and next.
- The Crypto Council for Innovation developed a new regulatory approach and policies for frameworks that balances financial safety and soundness, consumer protection, and innovation.
- The solutions are presented in the “Key Elements of an Effective DeFi Framework” white paper that communicates the core issues concerning regulators, to the DeFi community.
- Read the whitepaper.
Washington, D.C. (October 5, 2023) This year, regulators such as the Financial Stability Board, IOSCO, and European Commission are looking to adopt policy recommendations on decentralized finance (DeFi). Since DeFi is often misunderstood and presents different risks than traditional finance, the Crypto Council for Innovation developed solutions, insights and frameworks for regulating this nascent sector.
The “Key Elements of an Effective DeFi Framework” white paper aims to define DeFi for policymakers, offering a clear understanding of its unique benefits and risks, that also works for the DeFi industry.
New Regulatory Paradigm
DeFi is an ecosystem that provides direct access to financial services by leveraging blockchain technologies to remove the middlemen, such as traditional financial institutions.
“As a former regulator, I sympathize with policymakers grappling with the regulatory challenge of regulating financial services with no central intermediary. Without a central actor, there’s no regulatory hook.” says Linda Jeng, Head of Global Web3 Strategy at the Crypto Council for Innovation. “That’s why we put in significant resources to develop a new regulatory approach that works for the DeFi industry, regulators and most importantly, the consumers.”
The new regulatory approach balances financial safety and soundness, consumer protection, and innovation. It recognizes that DeFi poses risks that are fundamentally different from traditional finance risks. Therefore, the team proposes an updated regulatory principle for DeFi to ‘Same Activity, Different Risks, Different Regulation, but Same Regulatory Outcome” from “Same Activity, Same Regulatory Outcome.” This updated principle will ensure that the rules address the actual risks specific to DeFi and most especially, to protect consumers.
“Both TradFi and DeFi regulatory frameworks should achieve the same regulatory outcomes: safety and soundness of market participants, financial stability, and consumer and investor protection,” Jeng said. “The regulatory paradigm just needed an update.”
DeFi Protocols as Public Goods
The paper outlines why DeFi protocols should be encouraged to be developed to add functionality to the next iteration of the Internet. To support public good benefits, DeFi “Public Good Protocols” should exhibit five features: (1) Decentralization, (2) Open source, (3) Autonomy, (4) Standardization, and (5) Non-discriminatory access and use.
Guided by this updated regulatory principle, CCI proposed a new regulatory approach: “Regulate Businesses, Not Public Good Protocols.” Regulation and liability standards should apply to app-operating businesses, while a pathway should exist for public goods digital infrastructure to develop and decentralize safely.
Regulating Businesses, Not Public Good Protocols
CCI advocates for a regulatory approach centered on “Regulating Businesses, Not Public Good Protocols.” This approach includes mandatory disclosure requirements for app-operating businesses, the establishment of an Independent Certification Regime Organization (ICRO) to certify Public Good Protocols, and the implementation of a regulatory safe harbor for progressively decentralizing protocols to safeguard consumers and foster the responsible development of DeFi technologies.
“We have a unique opportunity to redefine the future of our financial landscape,” said Ji Kim, Head of Global Policy and General Counsel at the Crypto Council for Innovation. “We hope this white paper offers regulators a nuanced and comprehensive overview of DeFi and a properly balanced regulatory approach that ensures consumer protection, financial stability and responsible innovation. We look forward to continuing to work with policymakers and regulators around the world to best harness and encourage the exciting innovation that DeFi provides.”
About the Crypto Council for Innovation:
CCI is the premier global alliance for advancing innovation. It believes in leading with a global view, advocating for inclusive regulation, and developing evidence-based insights to support government and business leaders. It has teams in San Francisco, Washington, D.C., New York, Denver, London, Brussels, and Hong Kong.