The Financial Stability Board (FSB), a financial regulator supported by the Bank for International Settlements (BIS), is advocating for worldwide regulations for decentralized finance (DeFi) and has published a report on the risks it poses to financial stability.
The report identifies key weaknesses while acknowledging that DeFi’s functions do not significantly differ from traditional finance (TradFi), despite offering unique services.
The FSB warns that by trying to mimic some TradFi services, DeFi creates possible risks due to the lack of regulation and compliance, deployment of new technologies, and extensive ecosystem interlinkages.
As a result, the FSB is working with international standard-setting organizations to evaluate DeFi legislation across numerous jurisdictions to stop the growth of risks to financial stability associated with DeFi.
According to the FSB, the users’ entry points into DeFi, including centralized crypto asset platforms and stablecoins, are critical elements to consider. They suggested adding new prudential and investor protection criteria for these types of crypto-assets and companies or stepping up the enforcement of already-existing standards to reduce the risks associated with closer interconnections.
The FSB highlights the usage of asset-backed stablecoins such as Tether (USDT) and algorithmic stablecoins like Dai in the buying, selling, lending, and borrowing of other crypto-assets as crucial to the DeFi ecosystem.
The emergence of stablecoins would encourage corporate and retail customers to adopt DeFi solutions and make it easier for people to use crypto assets as payment methods. However, the FSB notes the need to comprehend the unique characteristics of various stablecoins to monitor the risk they pose to the cryptocurrency sector, especially DeFi ecosystems.
The FSB stated:
“With respect to liquidity and maturity mismatch issues, stablecoins are a crucial area of focus.”
This move aligns with the increased global regulator scrutiny of some significant stablecoins.
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