Morgan Stanley flags obstacles to continued explosive growth of DeFi

Over-collateralization and regulation will prove to be constraints on the continued exponential growth of the DeFi sector in the coming years. Morgan Staley analysts reached these conclusions, writes CoinDesk.

The investment bank’s analysts noted that they did not find much evidence to support the thesis that DeFi protocols significantly improve the traditional financial system.

“The projects look like a means of siphoning cash flows to enrich their operators. DeFi is prone to hacking and the risk of financial crime, as its hallmark is anonymity,” they wrote.

The absence of KYC/AML requirements will limit adoption among institutional players, and the integration of these requirements would make DeFi more centralized, the analysts explained.

“Over-collateralization in lending/borrowing does not increase the money supply. Without centralization DeFi will be harder to regard as an alternative to the current fractional-reserve banking approach,” — the analysts stressed.

Morgan Stanley forecast stronger oversight of the sector after regulators’ ‘slower’ response to the boom in this segment.

In August 2021, SEC Chairman Gary Gensler warned of an intensification of DeFi regulation. He later stressed that the decentralized nature of projects does not provide immunity from the agency’s oversight.

Subsequently the regulator drafted amendments to the Securities Act affecting the regulation of automated trading systems (ATS). SEC Commissioner Hester Peirce stated that they may threaten the operation of DeFi platforms.

Earlier the Bank for International Settlements called the decentralization of DeFi protocols an illusion. Experts expressed confidence that there will be cases where projects will require reorganization or valuation.

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