FSC issues consultation paper on DeFi: Regulatory Considerations on Financial Collaterals

The financial system has witnessed an increased democratization in recent years, whereby people are progressively reducing reliance on intermediaries for all sorts of financial transactions, especially for lending.

 

Decentralised lending revolves around online platforms that enable the provision of credit facilities to businesses or the public on a peer-to-peer basis with no intermediaries involved.

 

Collaterals lie at the heart of most lending/borrowing transactions and in traditional finance, these collaterals are safeguarded by a centralized intermediary.  In addition, the centralized intermediary is also responsible for the evaluation of the collaterals that have been pledged by the borrower and to assess its market value.

 

In the context of decentralized financing (DeFi), collaterals are accommodated via Distributed Ledger Technologies (DLT) where borrowers deposit collaterals (mainly intangible assets such as security tokens and virtual assets) as part of their financial transactions.  The 2 main mechanisms that are available for managing these collaterals include smart contracts and the use of tokenization.

 

In this vein, the Mauritius Financial Services Commission (FSC) issued a consultation paper titled “Decentralised Finance (DeFI): Regulatory Considerations on Financial Collaterals” for the public’s consideration.  The aims of this paper are to:

 

• address the nature, benefits and challenges of financial collaterals in the context of DeFI; and
• assess how the different forms of financial collaterals can accordingly be considered within the Mauritian regulatory system.

 

Stakeholders of the industry as well as the members of the public are invited to submit their comments/feedback to the FSC by 15 March 2024.

 

To access the full communique issued by the FSC and the accompanying consultation paper, please click HERE