BIS: regulated DeFi will have an enormous potential

Tue 07 Dec 2021 ▪ 20h16 ▪ 3 min read — by Katie Donaldson

The Bank for International Settlements (BIS), an international financial institution owned by more than 60 central banks, has published the Quarterly Review report on Monday, 6th December. The document states that the central bank group is paying close attention to decentralised finance (DeFi) and urges financial watchdogs to impose stricter rules over the crypto market.

The central bank of central banks on DeFi 

According to BIS’ officials, DeFi might not be as decentralised as crypto investors like to portray it. They noted that blockchain has an enormous potential to advance financial markets; however, the lack of crypto regulation can lead to a disaster.

“What we found is that, first, the decentralised aspect tends to be illusive,” Agustín Carstens, general manager of the BIS, commented on the news. “There are some incentive issues related to the fact that, through this decentralisation, at some point you end up with some agents that play an important role, and not necessarily for the best [interests] of users of financial services.”

The report says that a proper regulation framework is in investors’ best interests – BIS sees digital assets as high-risk investments due to wild price swings. The group doesn’t think that the trust in the crypto market will increase unless regulators make a decision on a proper set of rules.

BIS believes high leverage, liquidity mismatches, interconnectedness and the absence of shock-absorbing capacity traditionally offered by banks to be major vulnerabilities in the DeFi ecosystem.

“It’s important that we as authorities don’t feel complacent,” Carstens said. “There might be aspects that are safe but there are also some aspects that are not, and I think that should make us think seriously about it. Going forward, the growth of DeFi poses financial stability concerns.”

According to BIS, there is a ‘decentralisation illusion’ in DeFi due to the need for centralised governance. For instance, governance tokens are often used in DeFi projects so that certain individuals could access voting power. The holders are able to influence the project in several ways, as well join various decentralised autonomous organisations (DAOs).

The traditional financial system is yet to be integrated with DeFi; however, its representatives are talking about how promising blockchain technologies are more and more often. It’s possible that more financial institutions will join the global DeFi conversation after BIS’ report.

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Katie Donaldson

I went full time crypto back in June 2018, and have never looked back. I want to help persuade as many people as possible to come and build the decentralised future! Let’s go!

DISCLAIMER

The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.

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