DeFi Oversight: Consensys Advocates for Nuanced Approach Following IOSCO’s Report

As different jurisdictions gear up for regulations on the digital asset sector, DeFi remains a tricky subject.

The International Organization of Securities Commissions (IOSCO) had recently weighed in on the matter and recommended that governments should identify the “Responsible Person” behind ostensibly decentralized finance applications and subject them to regulatory oversight similar to conventional financial market participants.

Prominent blockchain software company – Consensys – has encouraged the global standard setter to clarify that some DeFi arrangements may have no “Responsible Person.”

Consensys Weighs in on “Responsible Person”

In a recent blog post, Consensys argued that IOSCO’s recommendation seems to presume that, in any given DeFi arrangement or activity, it is always possible to identify a Responsible Person who could be subject to regulatory obligations. It implies that decentralized systems either don’t exist or shouldn’t.

This presumption, limiting online innovation to centralized models, is concerning, according to Consensys, which then asked IOSCO to acknowledge that certain DeFi setups lack a “Responsible Person,” as the EU does in exempting “fully decentralized” setups from MiCA regulation.

Consensys admitted that the line between centralized and decentralized finance is more of a spectrum than a strict boundary but said that IOSCO’s recommendation oversimplifies this distinction.

As such, taking a binary approach to identifying Responsible Persons “seems to encourage regulators to find such a party “at any cost.” Consensys advocated the need for a nuanced approach in determining Responsible Persons in DeFi. The firm added that regulatory obligations should align with the level of control, primarily targeting the centralized end of the spectrum.

Various technical factors, such as governance, administrative control, oracle data, code availability, blockchain decentralization, and user interface diversity, must also be evaluated when assessing decentralization, according to Consensys, and regulators should refrain from imposing excessive obligations and, instead, consider a comprehensive range of decentralization factors to guide their decisions.

Narrowing Down Definition of “Responsible Person”

The definition of “Responsible Person” should be narrower, as applying traditional regulatory models doesn’t align with DeFi. The broad definition risks assigning responsibilities to individuals who cannot effect regulatory changes, creating legal uncertainty and discouraging innovation. Consensys advises against rigidly identifying Responsible Persons, as this could hinder the path towards decentralization.

Instead, the company proposes exploring alternative methods, such as incentivizing voluntary compliance, which promotes decentralization and reduces intermediary risks while allowing DeFi participants to contribute globally.