The Technology Advisory Committee (TAC) Digital Assets and Blockchain Technology Subcommittee of the Commodity Futures Trading Commission (CFTC) recently published a report titled "Decentralized Finance." The report puts forth recommendations aimed at mitigating risks to investors, consumers, market integrity, financial stability, and combating illegal financial risks. Emphasis is placed on the importance of resource assessment and data collection to enhance understanding of Decentralized Finance (DeFi). The report proposes a comprehensive mapping of existing DeFi to accurately measure its intrinsic connectivity and potential threat factors, such as leverage usage, concentration, and network security vulnerabilities.
In examining the existing regulatory scope, the report underscores the need for practical mapping efforts to determine whether DeFi products and services fall within the framework of U.S. financial regulations. Compliance levels should be assessed, and regulatory gaps identified. Collaboration with self-regulatory organizations is deemed crucial. Internationally, attention should be paid to peer regulatory situations to better address risks.
The report delves into various risk sources, including information asymmetry, conflicts of interest, operational risks, technical vulnerabilities, liquidity issues, excessive leverage, algorithmic bias, and more. It also highlights risks related to the financial and technical complexity of DeFi portfolios, inherent pro-cyclicality, and illicit financial activities.
To address these risks, the report proposes a range of potential policy responses, including disclosure requirements, regulatory reporting, third-party audits, access restrictions, regulatory supervision, governance regulation, behavior regulation, product regulation, balance sheet regulation, activity restrictions, structural regulation, and solution planning.
Finally, the report emphasizes the importance of collaboration and communication with domestic and international standard-setters, regulatory bodies, and DeFi builders. Given the continuous exploitation of DeFi due to a lack of Anti-Money Laundering/Counter-Terrorism Financing (AML/CFT) protections, concrete action regarding AML/CFT and digital identity is crucial. Policymakers are advised to adopt a holistic approach, assessing how to collect identity information, identifying gaps in compliance and requirements, and addressing specific risks (such as AML/CFT, consumer protection, etc.) and vulnerabilities. The report also suggests evaluating regulatory and implementation requirements options for cross-layer identity information discoverability and verification within the ecosystem. This process may involve more centralized regulation of identity information, credential repositories, and service providers, determining the level of identity information that financial participants at different layers of the DeFi stack should collect and utilize. These efforts are expected to drive the healthy development of the DeFi industry and strengthen the stability of the financial system.
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