With the FTX disaster, G20 watchdog focuses on decentralised finance

The Financial Stability Board (FSB) of the G20 announced on Thursday that it would take action to address the “vulnerabilities” and information gaps in decentralised finance (DeFi) that were brought to light by the failure of cryptocurrency exchange FTX last year.

The quickly expanding and unregulated DeFi market enables lending, borrowing, and trading in cryptocurrency assets using public blockchains as a decentralised ledger of transactions.

The FSB stated in a report to ministers from the Group of 20 (G20) major economies meeting next week that “the fact that crypto-assets underpinning much of DeFi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialise, as recent incidents demonstrate.”

According to the report, FSB member nations will now “proactively” analyse DeFi vulnerabilities as part of routinely monitoring the cryptocurrency markets.

Possible policy responses could, for instance, entail regulatory and supervisory demands for traditional financial institutions’ direct exposures to DeFi, according to the report.

According to the research, the failure of FTX in November of last year made intermediaries and DeFi vulnerable.

“With the lack of openness and transparency in these markets, it will take time to become obvious the full extent of the repercussions of this failure, particularly on DeFi projects that were owned by FTX or dependent on it for trading flows,” the report stated.

According to the research, “mismatches” in liquidity resulting from various maturities in liabilities and assets are DeFi’s most concerning vulnerability.

International coordination is necessary since some DeFi arrangements may be “intentionally” cross-border in order to take advantage of oversight weaknesses, it continued.

Regulators had mostly concentrated on cryptoassets rather than related technology up until the dramatic decline in bitcoin values and the FTX meltdown.

The FSB announced that it would also research the tokenization of real assets, or their digital form, which might strengthen ties between the DeFi and the crypto markets with the larger financial system and economy.

The paper suggested that in order to account for DeFi concerns, the FSB’s current recommendations for regulating cryptoassets may need to be strengthened.

Members of the FSB will also research whether current regulations for conventional finance could apply to DeFi activity.

According to the paper, compliance with applicable legislation must be enforced “if DeFi operations and companies are assessed to come inside the regulatory perimeter.”

New policies may be required for DeFi activities that violate existing regulations.