More identification of those behind decentralised finance activities needed: Global watchdog
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This scrutiny should include examining the roles of developers, large investors and venture capital firms, among others.
PHOTO ILLUSTRATION: ST FILE
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SINGAPORE – An international watchdog has called on regulators around the world to seek to identify the entities responsible for decentralised finance (DeFi) activities and, in turn, throw more light on an often murky corner of the finance sector.
This scrutiny should include examining the roles of developers, large investors and venture capital firms, among others.
The recommendations are among nine in a consultation paper from the International Organisation of Securities Commissions (IOSCO), an umbrella group of regulators that includes the Monetary Authority of Singapore (MAS) and the United States Securities and Exchange Commission.
Its recommendations, which address issues such as disclosure requirements and the promotion of cross-border cooperation, aim to address risks within DeFi that could stem from the anonymous nature of such operations.
DeFi is a form of finance that exists on blockchains, which are digital ledgers of transactions maintained by a global network of individual computers.
Smart contracts on a blockchain automatically execute the terms and conditions of financial transactions such as borrowing and lending between participants, supposedly removing the need for physical intermediaries such as banks.
These transactions involve a form of cryptocurrency known as tokens. Stablecoins, or tokens pegged to more stable, real-world assets like the Singapore or US dollar, may also be used by participants as a less volatile option.
These smart contracts are created by human developers, some of whom may choose to remain anonymous. DeFi applications may also involve investors who hold large amounts of “governance” tokens, or tokens that give participants voting rights over the operations of the application, thus negating some of its decentralised attributes.
Some DeFi applications are also backed by external parties such as venture capital funds. For example, prominent DeFi application Compound Finance raised US$25 million (S$34.1 million) in a funding round led by American venture capital firm Andreessen Horowitz in 2019.
Mr Lim Tuang Lee, assistant managing director for capital markets at MAS and chairman of IOSCO’s fintech task force, said: “There is a common misconception that DeFi is truly decentralised and governed by autonomous code or smart contracts.”
Mr Lim, who held a virtual briefing with IOSCO chairman and president Jean-Paul Servais on Thursday, added: “In reality... ‘responsible persons’ can be identified. Our recommendations are therefore predicated on the need to identify these persons, whether legal or natural, who should bear responsibility for upholding investor protection and market integrity.”
Digital assets such as cryptocurrencies can be regulated here under the Securities and Futures Act (SFA) or the Payment Services Act (PSA).
Entities offering digital tokens that constitute securities will be regulated under the SFA, while entities offering the buying, selling or exchanging of digital payment tokens such as cryptocurrencies are regulated as digital payment token service providers under the PSA.
In August, MAS announced its finalised rules for Singapore-licensed stablecoin issuers. Stablecoins issued here can be pegged only to the Singdollar or any Group of 10 currency, including the US dollar and Japanese yen.
Singapore-licensed stablecoin issuers will also have to meet requirements including having a minimum amount of reserves and allowing investors timely redemption at par value.
Last November, the first industry pilot under MAS’ Project Guardian
It involved the buying and selling of tokenised Singapore Government Securities, Singapore dollars, Japanese government bonds and Japanese yen on a public blockchain.
