IOSCO says DeFi is quickly evolving and 'cloning financial markets'

As decentralized finance (DeFi) space grows, regulators are giving more effort to conducting research and providing a means to better understand the emerging industry.

Today, the International Organization of Securities (IOSCO) published a report that aims to give a perspective on DeFi and highlight some areas that may be potential areas of concern to regulators. According to the report, DeFi is continuously growing and many of its mechanisms are very similar to traditional financial markets.

Apart from mirroring traditional finance, IOSCO mentions that a lot of financial products, services, arrangements, and activities in the DeFi industry sometimes overlap with more traditional finance operations.

Because of this, IOSCO encouraged regulators to understand the implications of DeFi developments with regard to their jurisdictions. As the DeFi market expands, IOSCO notes that “a granular and holistic understanding of the DeFi market” can enhance regulators’ ability to create laws relevant to their domains.

In the report, IOSCO recognized that there are many benefits presented by the DeFi industry. IOSCO Chair Ashley Alder said that “DeFi is a novel and fast-growing area of financial services.” However, the organization also noted the risks that it poses to users as the industry develops. Adler described the report as an outline of the “key areas of concern for IOSCO.”

Along with the report, IOSCO also created a task force that will cover the DeFi market. Tuang Lee Lim, the chair of the newly-formed task force mentioned that:

"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.”

Related: DeFi to reach mass adoption via institutional participation, DEX founder says

Meanwhile, a report by KuCoin Labs published in February notes that DeFi players may opt for DAO governance as regulatory risks are closing in. The report mentioned that DAOs can be recognized as legal entities and with it, community interest may be prioritized.