As the cryptocurrency market’s capitalization grows, the DeFi sector could pose long‑term risks to financial stability. This was stated by analysts from the stated group of the Federal Reserve System.
Analysts say the threat stems from the lack of clear regulatory rules for decentralized applications. In the published study, they noted that the sector has not yet become “systemically important,” but authorities should devote greater attention to it.
“The rapid growth in the role of programmable blockchains indicates that policy bodies must begin to give serious consideration to the full spectrum of financial stability issues that could arise if such activity becomes systemically important,” the document says.
The Fed emphasised that regulators lack the tools to enforce laws and regulations in DeFi. Analysts say market participants will “exhaust any and all advantageous opportunities, regardless of watchdog concerns.”
The Fed has also published a separate study on the impact of digital assets on financial stability. Analysts noted the need for tighter oversight of crypto firms that custody client funds.
“Oversight, comprehensive disclosure, as well as capital and liquidity requirements where necessary, can bolster the resilience of digital-asset ecosystem entities. For example, centralized entities acting as counterparties to retail customers typically do not face capital, liquidity, or comprehensive disclosure requirements,” the report says.
Analysts say the cryptocurrency industry is prone to accumulate financial vulnerabilities. At the same time, the Fed characterised the risks to economic stability as “insignificant”, citing limited interconnection between digital assets and the traditional market.
“If the digital financial system becomes more interconnected with the traditional one or expands the provision of financial services, these risks could quickly become material,” they added.
In July 2022, Fed Vice Chair the Fed urged tougher regulation of the cryptocurrency industry.
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