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International securities regulator Iosco is setting up a task force to examine the risks and opportunities arising from decentralised finance (DeFI), which it says is quickly evolving to mirror conventional financial markets.

Speaking on the publication of a report into DeFi markets, Ashley Alder, Iosco chair and chief executive officer of the Securities and Futures Commission (SFC) of Hong Kong, says: “DeFi is a novel and fast-growing area of financial services, and this report outlines key areas of concern for Iosco.”

The regulatory overview identifies some products and services which are novel to DeFi. But most of the new services which are emerging replicate more traditional financial services and activities, but with weaker regulation and increased risks for investors.

A recent report from Elliptic found that DeFi fraud and theft losses reached $10.5 billion in 2021.

The Iosco report casts doubt on a key claim of DeFi innovators that it is a peer-to-peer marketplace with no centralised insiders in control. By looking in detail at how DeFi works, it identifies central actors who, it concludes, often retain control - for example, through the distribution of 'governance tokens'. It also highlights the important role played by centralised trading platforms who often face substantial conflicts of interest.

In response to the report, Iosco has announced the establishment of a new task force to probe deeper into DeFi markets.

Tuang Lee Lim, assistant managing director of the Monetary Authority of Singapore (MAS) and chair of this new task force says: “Iosco's decision to establish the task force signifies our members’ resolve to take timely and coordinated policy action to appropriately address the risks arising from this fast-growing area. I look forward to working closely with experts and colleagues on the task force in charting its work ahead.”

Iosco has called for comment and input from the public, including crypto-asset market and DeFi participants and from any other interested party, on the issues raised.

Both the Bank of England and the Securities and Exchange Commission have raised concerns about the lack of transparency and opacity of DeFi market structures.

In a just-published report he Bank of England says that it intends to undertake "regular assessments of both the potential risks posed by cryptoassets and DeFi, and the regulatory initiatives that are currently under way to mitigate them, as well as making Recommendations where appropriate".

The Bank states: "Direct risks to the stability of the UK financial system from cryptoassets and DeFi are currently limited, reflecting their limited size and interconnectedness with the wider financial system. However, if the pace of growth seen in recent years continues, and as these assets become more interconnected with the wider financial system, cryptoassets and DeFi will present financial stability risks."

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