The Financial Stability Board (FSB), a financial regulator funded by the Bank for International Settlements (BIS), is pushing for international regulations for decentralized finance (DeFi).
The FSB on February 16 released a report on DeFi financial stability risks, highlighting key vulnerabilities, transmission channels and DeFi evolution.
Despite providing many “novel” services, DeFi is “not significantly different” from traditional finance (TradFi) in its functionality, authorities said in the report. By trying to replicate some of TradFi’s functions, DeFi increases its potential vulnerability due to the use of novel technologies, a high level of ecosystem interconnections and a lack of regulation or compliance, the FSB said.
Moreover, the actual level of decentralization in the DeFi system “often deviates” from the claims made by the founders, authorities said.
To prevent the development of DeFi-related financial stability risks, the FSB is working with global standard-setting bodies (SSBs) to establish DeFi regulations in multiple jurisdictions.
In this regard, a key element to consider is the entry point of DeFi users, 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 prudential and investor protection requirements, or improving the enforcement of existing requirements, can reduce the risks associated with closer interconnection.”
The FSB emphasized that asset-backed stablecoins like Tether (USDT) and algorithmic stablecoins like Dai (DAI) play an important role in the DeFi ecosystem through their use to buy, settle, trade, lend and borrow other crypto assets. The rise of stablecoins will 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, the regulator suggested.
“With problems of liquidity and inappropriate maturity, stablecoins are an important area of focus,” wrote the FSB, emphasizing the need to understand the peculiarities of different stablecoins in order to monitor the risks involved in the crypto industry, including the DeFi ecosystem.
related: Circle squashes rumors of planned SEC enforcement action
The news comes amid a crackdown on several major stablecoins by global regulators. On February 13, blockchain infrastructure platform Paxos Trust Company announced it would stop issuing Binance USD (BUSD) stablecoins amid a probe by New York regulators. The New York Department of Financial Services ordered Paxos Trust to stop issuing BUSD, stating that BUSD is an unregistered security.