BIS requests regulation of DeFi
The central bank of central banks is stressed over decentralized finance. The Bank for International Settlements, an umbrella gathering for national banks, said in a report this week that it’s worried there’s a decentralization deception in DeFi. DeFi is a quickly developing part of the digital money market that vows to convey conventional monetary products like loans and savings accounts without involvement from managed middlemen like banks. However, regulators are progressively worried about stages offering DeFi services that may not be pretty much as decentralized as promoted.
“There are some incentive issues related to the fact that, through this decentralization, at some point you end up with some agents that play an important role, and not necessarily for the best of users of financial services.”
“What we found is that, first, the decentralized aspect tends to be illusive,” Agustín Carstens, general manager of the BIS, told CNBC’s Julianna Tatelbaum Tuesday.
The central bank group did not mention any specific names related to its concerns.
Timo Lehes, a co-founder of decentralized crypto exchange Swarm Markets, accepted there was progress to be made in DeFi but said numerous institutions in the space are already working to address the systemic issues flagged by the BIS.
The BIS said DeFi must be “properly regulated” in order to safeguard investors and boost trust in the market.
“Ultimately, each protocol will face the decision of whether to transition to a compliant business model,” Lehes said in an emailed note Tuesday.
“There’s much to gain from operating within regulatory frameworks established to protect investors and maintain access to markets.”
Many DeFi services are built on top of Ethereum, the blockchain network behind ether, the world’s second-biggest cryptocurrency. Transactions are facilitated through so-called smart contracts, which automate various processes through lines of code. More than $100 billion worth of funds is currently sitting on Ethereum-based DeFi protocols, according to data from crypto news and research firm The Block. Some of the biggest platforms in the space include Maker, Curve and Compound.
DeFi sites are luring in investors with the promise of huge returns on their loans and savings. But they are increasingly being targeted by hackers and fraudsters. According to blockchain analytics firm Elliptic, over $10 billion has been lost to DeFi scams and thefts so far in 2021. The BIS said it believes the risks around DeFi have currently been contained to crypto markets but that, going forward, “the growth of DeFi poses financial stability concerns.”
The group flagged “severe” vulnerabilities with the industry, including highly-leveraged trades, liquidity issues and a lack of shock absorbers such as banks. “It’s important that we as authorities don’t feel complacent,” Carstens said. “There might be aspects that are safe but there are also some aspects that are not, and I think that should make us think seriously about it.”
News Summary:
- BIS requests regulation of DeFi
- Check all news and articles from the latest Business news updates.
