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As various jurisdictions prepare to implement regulations on the digital asset industry, DeFi continues to be a complex issue.
The International Organization of Securities Commissions (IOSCO) has recently addressed this topic, suggesting that governments should identify the “Responsible Person” behind seemingly decentralized finance applications and subject them to regulatory scrutiny akin to traditional financial market participants.
Leading blockchain software firm – Consensys – has urged the global standard-setting body to clarify that certain DeFi structures may not have a “Responsible Person.”
Consensys Addresses “Responsible Person”
In a recent blog entry, Consensys contended that IOSCO’s recommendation appears to assume that, in any specific DeFi arrangement or activity, it is always feasible to pinpoint a Responsible Person who could be held to regulatory responsibilities. This suggests that decentralized systems either do not exist or should not exist.
This assumption, which restricts online innovation to centralized frameworks, raises concerns for Consensys, which subsequently requested IOSCO to recognize that some DeFi configurations do not have a “Responsible Person,” similar to the EU’s exemption of “fully decentralized” structures from MiCA regulation.
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Consensys acknowledged that the distinction between centralized and decentralized finance is more of a continuum than a rigid line but stated that IOSCO’s recommendation oversimplifies this differentiation.
Consequently, adopting a binary approach to identifying Responsible Persons “appears to push regulators to locate such a party “at any cost.” Consensys emphasized the necessity for a more nuanced strategy in determining Responsible Persons in DeFi. The firm noted that regulatory responsibilities should correspond with the degree of control, primarily focusing on the centralized end of the spectrum.
Numerous technical aspects, including governance, administrative authority, oracle data, code accessibility, blockchain decentralization, and user interface variety, should also be considered when evaluating decentralization, according to Consensys, and regulators ought to avoid imposing excessive requirements and, instead, take into account a broad array of decentralization factors to inform their decisions.
Refining the Definition of “Responsible Person”
The definition of “Responsible Person” ought to be more precise, as applying conventional regulatory frameworks does not align with DeFi. A broad definition risks placing responsibilities on individuals who cannot implement regulatory changes, leading to legal ambiguity and stifling innovation. Consensys cautions against rigidly defining Responsible Persons, as this could obstruct the progression towards decentralization.
Rather, the firm suggests investigating alternative approaches, such as encouraging voluntary compliance, which fosters decentralization and mitigates intermediary risks while enabling DeFi participants to engage globally.
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