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BIS encourages DeFi regulation

Central banks are concerned about “decentralized finance.”

The Bank for International Settlements, a group under the central bank, said in a report this week that it was concerned that DeFi might have a “decentralization illusion.”

DeFi is a fast-growing part of the cryptocurrency market that promises to offer traditional financial products such as loans and savings accounts without the involvement of regulated intermediaries such as banks.

However, regulators are increasingly concerned about platforms that offer DeFi services that may not be as “decentralized” as advertised.

“First of all, we found that the decentralized side tends to be fantastic,” BIS general manager Agustín Carstens told CNBC’s Juliana Tatterbaum on Tuesday. ..

“There are some incentive issues related to the fact that this decentralization creates agents that play an important role at some point, but we don’t necessarily have to do our best. [interests] Of users of financial services. “

The central banking group does not mention specific names related to that concern.

BIS said DeFi needs to be “properly regulated” to protect investors and increase market confidence.

Timo Lehes, co-founder of Decentralized Cryptographic Exchange Swarm Markets, acknowledged that there was progress in DeFi, but many agencies in this area have addressed systematic issues flagged by BIS. Said that he is already working on.

“Ultimately, each protocol will face a decision on whether to move to a compliant business model,” Reets said in an email Tuesday.

“There is much to be gained from operating within an established regulatory framework to protect investors and maintain access to the market.”

Many DeFi services are built on Ethereum, the blockchain network behind Ethereum, the world’s second largest cryptocurrency. Transactions are facilitated by so-called smart contracts, which automate various processes through lines of code.

More than $ 100 billion is currently being spent on the Ethereum-based DeFi protocol, according to data from crypto news and research firm The Block. The largest platforms in this area include Maker, Curve and Compound.

DeFi sites attract investors by promising huge profits on loans and savings. But they are increasingly being targeted by hackers and scammers. By 2021, more than $ 10 billion was lost in DeFi scams and thefts, according to blockchain analytics firm Elliptic.

BIS believes that the risks surrounding DeFi are currently contained in the cryptocurrency market, but in the future, “DeFi’s growth raises concerns about financial stability.”

The group has flagged “serious” vulnerabilities in the industry, including highly leveraged transactions, liquidity issues, and lack of shock absorbers such as banks.

“It’s important that we, as authorities, don’t feel complacent,” Curstens said. “It may be safe, but it’s not, so I think it makes me think seriously.”

BIS encourages DeFi regulation

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