The nine policy recommendations aim to address "market integrity and investor protection concerns" arising from DeFi by supporting "greater consistency of regulatory frameworks and oversight" in member jurisdictions.

The recommendations cover six key areas:

1. understanding DeFi arrangements and structures;

2. achieving common standards of regulatory outcomes;

3. identification and management of key risks;

4. clear, accurate and comprehensive disclosures;

5. enforcement of applicable laws; and

6. cross-border cooperation.

The DeFi policy recommendations are complementary to the Policy Recommendations for Crypto and Digital Assets (CDA) Markets published in November 2023.

The two sets of IOSCO recommendations have been developed in accordance with IOSCO’s Cryptoasset Roadmap 2022/2023, and the interoperability between the two sets of recommendations is detailed in the Umbrella Note which has been published alongside the DeFi Final Report.

These recommendations "elaborate the regulatory expectations, either through application of existing rules or development of new rules, depending on the jurisdiction, to address the key areas of harm observed in these markets."

The 18 recommendations, which are principles-based and outcomes-focused and aimed at the activities of cryptoasset service providers, cover six key areas:

1. conflicts of interest arising from vertical integration of activities and functions;

2. market manipulation, insider trading and fraud;

3. custody and client asset protection;

4. cross-border risks and regulatory cooperation;

5. operational and technological risk; and

6. retail distribution.

The Recommendations cover six key areas:

1. Understanding DeFi Arrangements and Structures 
2. Achieving Common Standards of Regulatory Outcomes 
3. Identification and Management of Key Risks 
4. Clear, Accurate and Comprehensive Disclosures
5. Enforcement of Applicable Laws 
6. Cross-Border Cooperation. 

IOSCO aims to finalise its DeFi recommendations towards the end of the year, in accordance with its Cryptoasset Roadmap of July 2022, and in conjunction with its Crypto and Digital Assets Markets recommendations issued for consulation in May 2023. 

Jean-Paul Servais, IOSCO Board Chair, said: “By supporting greater consistency of regulatory frameworks and oversight across member jurisdictions, the DeFi recommendations complement the Crypto and Digital Assets Recommendations published in May 2023. Once finalised, the two sets of Recommendations will provide a first clear, interoperable, and globally consistent policy framework for crypto and digital assets, including DeFi. This report marks a significant step forward in achieving regulatory outcomes for investor protection and market integrity that are the same as, or consistent with, those required in traditional financial markets across IOSCO’s 130 member jurisdictions.” 

Deadline for comments is 19 October 2023.

The proposed recommendations are "principles-based and outcomes-focused" and are aimed at the activities performed by cryptoasset service providers (CASPs).

The recommendations cover a range of activities involving CASPs from offering, admission to trading, ongoing trading, settlement, market surveillance and custody, as well as marketing and distribution (covering advised and non-advised sales) to retail investors. The proposed recommendations do not cover activities, products or services provided in decentralized finance.

The proposed recommendations also cover the need for enhanced cooperation among regulators. They aim to provide a "critical benchmark" for IOSCO members to "cooperate, coordinate and respond to cross-border challenges in enforcement and supervision", including regulatory arbitrage concerns, that arise from "global cryptoasset activities conducted by CASPs that offer their services, often remotely, into multiple jurisdictions".

Deadline for comments is 31 July 2023.

The report provides a global point-in-time view on the evolving retail trading environment, and outlines a suite of measures for regulators to consider involving:

• supervisory and enforcement issues emerging from cross-border offerings, and the need to enhance cooperation frameworks
• conduct and fraud implications emerging from recent cryptoasset trading trends
• increased greenwashing risk and the need to better identify compliance with climate disclosure standards
• impact of social media and finfluencer activity on retail decisions and behaviour, and the need to heighten regulators’ digital presence and strategies
• the escalation in unlicensed activity and the surge in self-directed online trading.

This analysis will inform ASIC’s strategic priorities on retail investor harms concerning cryptoassets, sustainable finance, scams and Australia’s design and distribution obligation laws.

In its press release, IOSCO said: 

"Digitalisation and social media are changing the way financial services and products are marketed and distributed to retail investors, providing greater opportunities for firms to reach a broader investor base and for retail investors to access a wider range of products. Digitalisation and social media also present risks associated with the use of behavioural and gamification techniques and financial influencers that impact retail investor trading behaviour.

"Developments in digital offerings, including use of new complex products such as cryptoassets, give rise to novel regulatory and investor protection challenges, spanning the whole distribution chain. As digitalisation trends evolve faster than regulatory frameworks, there is a risk that retail investors could be exposed to harmful or even fraudulent online activity."

The report looks at global developments in online marketing and distribution of financial products to retail investors and discusses enforcement challenges encountered by regulators. It sets out examples of how some member jurisdictions have addressed these issues. 

The final guidance, which follows October 2021's proposals for consultation, reconfirms that if a stablecoin arrangement performs a transfer function and is determined by authorities to be systemically important, the stablecoin arrangement as a whole would be expected to observe all relevant principles of the Principles for Financial Market Infrastructures (PFMI).