Bermuda Monetary Authority calls for proposals: Embedded supervision in DeFi
Embedded supervision leverages technology to automate compliance and reporting, enabling real-time regulatory oversight within DeFi platforms. The BMA’s approach is to enhance the effectiveness and efficiency of financial regulation in an increasingly decentralised world.
Objectives of the pilot project
The initiative seeks to:
- Understand DeFi risks and regulation: Collaborate with industry stakeholders to develop adaptive, risk-based regulatory frameworks.
- Assess technical feasibility and operational efficacy: Identify key components for embedded supervision and evaluate automated compliance mechanisms.
- Monitoring risk and develop best practices: Monitor risk parameters, assess efficiency gains, and establish regulatory guidelines for DeFi oversight.
Why it matters
DeFi is a transformative financial services ecosystem built on Distributed Ledger Technology (DLT), aiming to enhance accessibility, transparency, and efficiency through decentralisation. Key components include smart contracts, peer-to-peer networks, and protocols, which operate without traditional intermediaries.
Despite its benefits, DeFi presents unique regulatory challenges. Key concerns include:
- Decentralisation complexity: Determining responsibility for compliance in distributed networks.
- AML/KYC challenges: Adapting anti-money laundering and identity verification processes.
- Global operations: Navigating cross-border regulatory frameworks.
- Rapid innovation: Keeping pace with DeFi’s evolving technologies and governance models.
Potential pilot projects
The BMA encourages creative proposals, including:
- Regulatory Decentralised Autonomous Organisation (DAO) implementation: Testing a decentralised governance model with BMA participation.
- Smart contract compliance: Embedding regulatory conditions into DeFi smart contracts.
- Real-time compliance reporting: Automating data collection and compliance checks in real-time.
- DeFi lending oversight: Supervising lending platforms with embedded risk monitoring.
The BMA invites DeFi operators, FinTech firms, protocol developers, digital asset businesses, academic institutions, and other industry stakeholders to participate in this initiative.
Interested participants must submit a proposal by 30 April 2025 via email to fintech@bma.bm. Proposals should outline objectives, methodology, technological framework, risk assessment, and regulatory alignment.
For full details, BMA’s official consultation can be found here.
