Chairmen of leading central banks, in an online discussion organized by the Bank of France, said that strengthening regulation of the decentralized finance (DeFi) sector is warranted as it develops.
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The head of the the Fed Jerome Powell said there are structural problems in the DeFi ecosystem. In his view, one of them is a lack of transparency.
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“The good news, I think, is that, from a financial-stability perspective, interaction between the DeFi ecosystem and the traditional banking system is not that great at the moment,” said the Fed chair.
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However Powell warned that such a situation “will not persist forever”. He pointed to a “real need for more appropriate regulation” as the DeFi sector expands.
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In the chair’s speech, a parallel with recent findings by the department’s researchers runs. In their view, the lack of a clear regulatory framework threatens long-term risks to financial stability from DeFi.
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Meanwhile, the head of the MAS Ravi Menon emphasised the importance of distinguishing between the different components of the crypto ecosystem and the kinds of risks and advantages each presents.
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“If you look, for instance, at tokenised assets, many banks are experimenting with them. They carry lower risk but are not the predominant part of the ecosystem, though that is where the real potential lies”,
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According to him, the greatest challenge facing the DeFi sector is the difficulty of applying regulation. Yet overcoming this challenge opens up \”some prospects\” for the segment, Menon added.
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President of the European Central Bank Christine Lagarde reminded about Terra crash. In her view, this case \”justifies\” tougher regulation.
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“If we do not participate in this game, if we do not participate in experiments and innovations regarding central bank digital currencies, we risk losing the anchor role we have played for many decades,” she said.
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Another nod to the Terra incident came from BIS head Agustín Carstens. He noted the role of stablecoins in DeFi and said their collateralisation is often ineffective. He suggested that the sector has \”structural problems and internal weaknesses\”.
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“DeFi applications simplify borrowing, lending and trading, but intermediaries are also exposed to traditional risks such as liquidity, counterparty risk and leverage risk, and DeFi lacks the infrastructure to address this”
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European Commissioner for Financial Stability, Financial Services and the Capital Markets Union Mairead McGuinness pointed to the potential of blockchain technology, which eliminates intermediaries and removes the need for centralized processes.
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However, she agreed with her colleagues that without regulation, cryptocurrencies pose a threat.
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“This new ecosystem [DeFi] holds both opportunities and risks for firms, the financial system and society at large, so we need to take them into account if we want to capitalise on the opportunities”
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Earlier, EU authorities agreed on a regulation bill for cryptocurrencies, MiCA. It outlines the rules applicable to issuers of unbacked crypto assets, \”stablecoins\”, trading and custody platforms.
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Binance CEO Changpeng Zhao described the document as \”fantastic\”, but \”a little strict\” with respect to stablecoins.
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Earlier this month, U.S. authorities unveiled a concept for regulating the cryptocurrency industry. It envisions a host of initiatives, including tougher enforcement actions against providers of services related to digital assets.
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Bloomberg subsequently reported on a draft bill to regulate stablecoins. In particular, it would impose a two-year ban on new algorithmic stablecoins similar to TerraUSD.
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Coinbase CEO Brian Armstrong criticized the U.S. approach to regulating the crypto industry. In his view, the hardline stance of authorities is hindering the sector’s development and driving projects to leave the country.
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