The BMA invites proposals to test Embedded Supervision in DeFi

• The Bermuda Monetary Authority ("BMA") has issued an invite for proposals from voluntary participants to take part in a pilot project aimed at testing Embedded Supervision practices within the context of DeFi.
• Embedded supervision refers to automated monitoring of compliance with a regulatory framework by a decentralised finance ("DeFi") platform.
• By working with the BMA, participants can shape the future of compliance and supervisory approach in the DeFi space. 

Introduction

Embedded supervision refers to automated monitoring of compliance with a regulatory framework by a decentralised finance ("DeFi") platform. This is achieved through monitoring tools embedded in the decentralised ledger technology.  

The Bermuda Monetary Authority ("BMA") has issued an invite for proposals from voluntary participants to take part in a collaborative pilot project aimed at testing Embedded Supervision practices within the context of DeFi.

The BMA is looking to work with Digital Asset Businesses, Foundations, Protocols, FinTech companies, DeFi operators, technology developers and academic institutions to take part in the pilot, providing an opportunity for such stakeholders to play a key role in shaping the future of regulatory supervision in digital finance. Interested parties should submit their proposal by 30 April 2025.

Objectives

An intrinsic part of Decentralised Finance applications is smart contracts, peer-to-peer networks, and protocols that collectively work towards achieving enhanced transparency, accessibility, accountability and efficacy through removing hurdles associated with traditional finance.

However, with the benefits of DeFi come specific and new challenges for regulators. For instance, the lack of central authority, technological complexity, borderless nature (complicating jurisdictional authority) and rapid evolution all bring forth unique difficulties for traditional methods of regulatory oversight. The BMA view the Embedded Supervision model as an innovative method which provides regulatory oversight by integrating regulatory requirements within a supervised institution's systems for real-time and efficient compliance monitoring. The BMA believes that piloting Embedded Supervision could be instrumental in enhancing regulatory practices for projects in the realm of DeFi.

The BMA's pilot project has 3 key objectives:

• Collaborative understanding (engaging with industry participants) and risk-based regulation 
• Technical feasibility and operation efficacy (determining the scope of Embedded Supervision)
• Risk monitoring and development of best practices (evaluating the effectiveness of automated oversight)

Example Pilot Projects

• Smart Contract-Driven Regulatory Compliance: A pilot project could investigate the feasibility of integrating key regulatory requirements (including licence conditions) into the smart contracts that underpin a Decentralised Finance platform
• Collateral Management Supervision: This project could explore implementing Embedded Supervision to monitor the collateral levels for issued stablecoins continuously. Automated alerts could be triggered if collateral thresholds defined by regulatory guidelines are breached.

Proposal Submission Guidelines

The project proposals should provide a comprehensive overview of the proposed pilot and include the following 8 key elements:

•  Executive Summary
• Project Description and Objectives
• Methodology
• Work Plan and Timeline
• Technological Overview
• Regulatory Considerations
• High-Level Risk Analysis and Management
• Team Composition and Roles 

Evaluation Criteria & Fees

The BMA has invited pilot project proposals that are innovative, feasible, and achievable. Applicants and projects will be evaluated on multiple metrics such as the soundness of the proposed approach and its potential impact on enhancing regulatory practices.

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