The World Economic Forum (WEF) urged policymakers and regulators worldwide to conduct decentralized finance (DeFi)-related innovations and experiments within regulatory sandboxes, focusing on tailored risk mitigation and transparency.

In its recent assessment of nine major economies, including the United States, the United Kingdom, Japan and the United Arab Emirates, the WEF identified the need for a tailored approach to regulating the DeFi ecosystem.

The report recommended using sandboxes to keep DeFi investments within regulatory frameworks, allowing for controlled experimentation while managing associated risks and ensuring transparency.

WEF assessed nine jurisdictions on current efforts toward DeFi innovations. Source: WEF

Sandbox approach drives DeFi innovation

According to the WEF, countries that have adopted “a nimble, sandbox-first approach” to address inherent risks show signs of progress in DeFi innovation. It supported using a controlled environment for experimentation with digital assets and decentralized protocols:

“The success of regulatory sandboxes highlights the potential for collaborative innovation in DeFi.”

The WEF also noted that only 9% of all jurisdictions studied have applied existing financial regulation to digital assets. The UK, Hong Kong and Singapore were the only jurisdictions that have established or are developing a tailored regulatory framework. The report added:

“To date, around 33% of jurisdictions lack a regulatory framework and are not currently working on one.”

Regulatory framework for stablecoins and other crypto assets. Source: WEF

The WEF recommended using sandboxes to build compliant ecosystems for jurisdictions eyeing DeFi innovations. 

WEF highlights tailored risk mitigation

The WEF stressed the importance of collaboration between regulators and DeFi platforms to ensure consistent communication about the risks involved. The report also suggested that licensing models that account for the decentralized nature of DeFi have helped facilitate progress.

The WEF report underscored the misalignment between traditional financial regulations and decentralized economies.

Related: DeFi may struggle to stay decentralized after new EU law

“Policymakers and regulators should, therefore, explore the possibility of achieving the crucial aims of protecting consumers, maintaining market integrity and promoting innovation by calibrating requirements and parameter definitions for decentralized networks,” the WEF report concluded.

The European Blockchain Sandbox Initiative (EBSI) recently onboarded 41 authorities and regulators from 22 countries to participate in the second cohort of its blockchain sandbox initiative.

The project aims to provide a framework for blockchain projects, regulators and authorities to engage in dialogue and identify legal and regulatory obstacles to blockchain innovation.

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