WEF backs ‘Sandbox-first approach’ for DeFi adoption

The World Economic Forum recommended using regulatory sandboxes to foster decentralized finance innovation while mitigating risks.

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.

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.”

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