Regulation of Crypto-Finance Research Project (October 2023)
IOSCO is correct to identify conflicts of interest (Recommendation 4) and operational and technological risks (Recommendation 5) as issues of concern in DeFi that need to be addressed by providers of DeFi products and services. However, to the extent that these are also appropriate concerns for regulators, it is essential to apply the ‘same activity, same risk, same regulatory outcome’ principle correctly. This requires a sound understanding of what activities and risks are the same between traditional financial markets and DeFi. In this brief commentary, I focus on the difficulties of analogizing activities known as MEV—discussed in the Report—with traditional finance. I also note the experimental and rapidly evolving nature of the mechanisms that DeFi service providers can adopt in response to MEV. Hence, I argue that it is premature for regulators to intervene by imposing specific solutions. Instead, I suggest in-depth engagement with the industry and academic experts.