Consensys Urges Nuanced Approach in Response to IOSCO’s Report

DeFi Regulations: Consensys Urges Clarification on “Responsible Person”

As governments around the world prepare to implement regulations on the digital asset sector, decentralized finance (DeFi) remains a complex and challenging subject. The International Organization of Securities Commissions (IOSCO) recently shared its recommendation that governments should identify the “Responsible Person” behind decentralized finance applications and subject them to regulatory oversight similar to traditional financial market participants. However, Consensys, a leading blockchain software company, has urged IOSCO to clarify that certain DeFi arrangements may not have a “Responsible Person.”

In a recent blog post, Consensys argued that IOSCO’s recommendation assumes that there is always a Responsible Person in any DeFi arrangement or activity who can be subject to regulatory obligations. This assumption disregards the existence and importance of decentralized systems. Consensys called on IOSCO to acknowledge that some DeFi setups lack a Responsible Person, similar to the European Union’s exemption of “fully decentralized” setups from MiCA regulation.

Consensys acknowledged that the line between centralized and decentralized finance is more of a spectrum than a strict boundary. The company believes that IOSCO’s recommendation oversimplifies this distinction. Taking a binary approach to identifying Responsible Persons could lead regulators to search for such a party at any cost. Consensys emphasized the need for a nuanced approach in determining Responsible Persons in DeFi. The company suggested that regulatory obligations should align with the level of control, primarily focusing on the centralized end of the spectrum.

Consensys also highlighted the importance of evaluating various technical factors when assessing decentralization. These factors include governance, administrative control, oracle data, code availability, blockchain decentralization, and user interface diversity. Regulators should consider a comprehensive range of decentralization factors instead of imposing excessive obligations.

Narrowing Down the Definition of “Responsible Person”

Consensys believes that the definition of “Responsible Person” should be narrower as applying traditional regulatory models does not align with the nature of DeFi. A broad definition risks assigning responsibilities to individuals who cannot effect regulatory changes, creating legal uncertainty and discouraging innovation. Instead, Consensys proposes exploring alternative methods, such as incentivizing voluntary compliance, which promotes decentralization and reduces intermediary risks while allowing DeFi participants to contribute globally.