The Financial Stability Board (FSB), the financial regulator funded by the Bank for International Settlements (BIS), is pushing international regulations for decentralized finance (DeFi).
On February 16, the FSB issued a report on the financial stability risks of DeFi, highlighting the main vulnerabilities, transmission channels and the evolution of DeFi.
Despite providing many "novel" services, DeFi "does not differ substantially" from traditional finance (TradFi) in its functions, the authority said in the report. By trying to replicate some functions of TradFi, DeFi increases potential vulnerabilities due to the use of novel technologies, the high degree of interconnectedness of ecosystems, and the lack of regulation or enforcement, the FSB argued.
Furthermore, the authority claimed that the actual degree of decentralization in DeFi systems โoften deviates substantiallyโ from the stated claims of the founding creators.
To prevent the development of financial stability risks associated with DeFi, the FSB is cooperating with global standard-setting bodies to assess DeFi regulations in multiple jurisdictions.
In this regard, a key element to consider would be DeFi user entry points, including stablecoins and centralized crypto-asset platforms, the FSB said, adding:
"The FSB may consider whether subjecting these types and entities of crypto assets to additional investor and prudential protection requirements, or intensifying enforcement of existing requirements, could reduce the risks inherent in closer interconnections."
The FSB emphasized that asset-backed stablecoins like Tether (USDT) and algorithmic stablecoins such as Dai (ICD) play an important role within the DeFi ecosystem through their use in buying, liquidating, trading, lending, and borrowing other crypto assets. The regulator suggested that the rise of stablecoins would likely also increase the adoption of DeFi solutions by retail and corporate users, as well as facilitate the adoption of crypto assets as a means of payment.
โRegarding liquidity and maturity mismatch issues, stablecoins are a crucial area of โโfocus,โ the FSB wrote, emphasizing the need to understand the peculiarities of different stablecoins in order to monitor the risk they pose to the trading industry. cryptography, including DeFi ecosystems.
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The news comes amid increasing scrutiny of some of the major stablecoins by global regulators. On February 13, the blockchain infrastructure platform Paxos Trust announced that stop issuing Binance USD (BUSD) stablecoins amid an ongoing investigation by New York regulators. The New York Department of Financial Services ordered Paxos Trust to stop issuing BUSD, claiming that BUSD is an unregistered security.
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