Decentralization Promised By DeFi Is An “Illusion” And A Threat To Global Financial Stability, BIS Warns | Currency News | Financial and business news

Tether, USD Coin and Dai are the three largest stablecoins by market cap, according to price tracking website CoinMarketCap.
  • DeFi poses risks to global financial stability and “systemic regulation” is needed, the Bank for International Settlements said on Monday.
  • Decentralized finance “appears to operate largely within its own ecosystem,” the institution said in a quarterly report.
  • The DeFi market has exploded beyond a valuation of $ 100 billion in 2021.

The Bank for International Settlements said on Monday that global “systemic regulation” was needed to oversee banking activities taking place outside traditional financial institutions because DeFi, or decentralized finance, poses stability risks.

The DeFi market for blockchain-based peer-to-peer financial transactions has exceeded $ 100 billion in valuation this year. It recently achieved a market cap of $ 143 billion in the larger cryptocurrency market of $ 2.4 trillion. Stablecoins are a popular vehicle to facilitate DeFi projects such as crypto lending and borrowing platforms.

“DeFi supporters point to its potential efficiency gains,” such as reducing high costs and slow speeds within traditional financial systems, the central bank forum said in a quarterly review published Monday on developments banking and financial markets.

“For now, these gains are difficult to detect: DeFi appears to operate largely within its own ecosystem, with little financial intermediation services provided to the real economy,” wrote the institution known as central bank name of central banks. .

“At the same time, in addition to raising key concerns for money laundering and investor protection, DeFi presents substantial financial vulnerabilities,” which go beyond more traditional forms of financing, he said. declared. Stables – “the grease between the DeFi wheels” – are subject to classic runs and the backing of liquid claims with less liquid reserve assets can trigger downward price spirals similar to those resulting from repurchases in the industry. investment funds, the BIS said.

The institution said there was “the illusion” that DeFi was decentralized. But DeFi needs centralized governance to make strategic and operational decisions, he said. “In addition, certain features of DeFi, notably the consensus mechanism, promote a concentration of power.”

DeFi has the potential to complement traditional financial activities. But for now, BIS has argued that it “has few uses in the real economy and, for the most part, supports speculation and arbitrage across multiple cryptoassets.”

So far, the risks in the crypto ecosystem have manifested in the form of frequent and significant price drops. “We still do not know if such weaknesses are limited to this ecosystem or can have repercussions on the traditional ecosystem. But the potential for spillovers should not be underestimated, especially since the stable parts agreements themselves. same can create important links, “said BIS.

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