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Writer's pictureJames Ross
Aug 33 min read

Quarterly DeFi Review: International Developments Q2 2024

The decentralised finance (DeFi) landscape continues to evolve rapidly, with significant developments worldwide in the second quarter of 2024. This review highlights key regulatory updates, technological advancements, and market trends impacting the DeFi ecosystem in various regions.



Europe


  • Ethical Guidelines for Blockchain Systems: The Expert Group on Blockchain Ethics (EGBE) has released ethical guidelines for blockchain systems, emphasising inclusion, non-discrimination, data privacy, governance, and sustainability. Firms must consider these guidelines when designing and implementing blockchain-based financial solutions.

  • DLT Pilot Regime: The European Commission has reaffirmed its commitment to the DLT Pilot Regime, which facilitates innovation and creates efficient capital markets. Firms can expect more clarity on legal issues and a stable environment for exploring DLT-based solutions in the financial market.

  • EBA's DLT Monitoring: The European Banking Authority (EBA) is actively monitoring the increasing use of DLT in the EU banking and payments sector. Firms are encouraged to explore DLT use cases, comply with regulations, and develop robust risk management frameworks.

  • Liquid Staking Tokens (LSTs): The regulatory status of LSTs under MiFID II and MiCA remains unclear. Firms involved in staking services must closely monitor regulatory developments and prepare for potential compliance obligations.

  • Intelligent Contract Categorisation: A new methodology using natural language processing and topic modelling has been proposed to categorise smart contracts, aiding regulators in monitoring DeFi and identifying potential risks.

  • Management Buffer Practices: The EBA is working to clarify the interactions between different regulatory stacks and provide guidance on capital buffer management. Banks should review their buffer strategies and monitor regulatory developments.


United Kingdom


  • Digital Assets: Governing Law and Jurisdiction: The Financial Markets Law Committee report proposes solutions to address legal uncertainty surrounding digital assets. The proposed statutory rule would prioritise the system of law specified in the asset or DLT system, providing greater clarity for financial market participants.

  • NFT Advertising: The Advertising Standards Authority (ASA) oversees NFT ads, emphasising the need to thoroughly disclose material information, risks, costs, and ownership restrictions.

  • Decentralised Autonomous Organisations (DAOs): The Law Commission's scoping paper on DAOs highlights regulatory challenges and the need for legal clarity. Firms involved with DAOs must ensure compliance with relevant regulations and address potential risks.

  • Digital Assets as Property: The Law Commission recommends recognising digital assets as a "third category" of personal property, providing legal certainty and enhancing owners' protection.


India


  • DeFi's Rise and Challenges: The Reserve Bank of India's monthly bulletin highlights DeFi's speculative nature, volatility, and regulatory challenges. Investors are urged to exercise caution.


Japan


  • Digitalisation of Finance: The Basel Committee on Banking Supervision (BCBS) report analyses the growing digitalisation of finance, highlighting its transformative impact on the banking industry and the need for risk mitigation strategies.


International


  • Basel III and Crypto Asset Standards: The Group of Central Bank Governors and Heads of Supervision (GHOS) reaffirms its commitment to implementing Basel III and delays implementing the crypto asset standard for banks to January 1, 2026.

  • Crypto Exchange Tokens: A BIS working paper analyses crypto exchange tokens and their buyback mechanisms, highlighting potential pitfalls like higher capital costs and price manipulation.

  • Crypto Asset Exposures Disclosure: The BCBS has finalised a standard for banks to disclose their crypto asset exposures, enhancing transparency and market discipline.

  • FATF Standards Implementation: This targeted update highlights the slow global implementation of AML/CFT standards for virtual assets and VASPs. It provides recommendations for both the public and private sectors.

  • Crypto Markets and Capital Flight: An IMF report examines how crypto markets, especially exchanges, can facilitate capital flight, particularly in countries with capital controls. Policymakers are urged to monitor crypto markets and strengthen regulatory frameworks.

  • Decentralised Finance in Hong Kong: A report by the Hong Kong Institute for Monetary and Financial Research explores DeFi's potential and challenges in Hong Kong, recommending a principle-based regulatory framework and further research.


Significant regulatory and technological advancements in the DeFi space occurred in the second quarter of 2024. As the ecosystem evolves, firms must stay informed, adapt to new regulations, and proactively manage risks to thrive in this dynamic landscape.




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The posts listed on the 'What we think' webpages are our interpretation of regulatory developments we have been reading about. They should not be considered legal, regulatory or other advice. Contact us if you want to understand the impact of public policy, regulation and governance changes for you.

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