The Financial Stability Board (FSB), a financial regulator funded by the Bank for International Settlements (BIS), is driving global regulation of decentralized finance (DeFi).
FSB on February 16 issued DeFi’s financial stability risk report highlights key vulnerabilities, transmission channels, and the evolution of DeFi.
Despite offering many “novel” services, DeFi is “virtually no different” from traditional finance (TradFi) in its functioning, the agency said in its report. The FSB argued that by trying to replicate some features of TradFi, DeFi increases potential vulnerabilities through the use of new technologies, highly interconnected ecosystems, and lack of regulation and compliance. I’m here.
Furthermore, the official argued that the actual degree of decentralization in DeFi systems “often deviates significantly” from the stated claims of the founders.
To prevent DeFi-related financial stability risks from arising, the FSB is working with international standard-setting bodies (SSBs) to assess DeFi regulation across multiple jurisdictions.
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In this regard, a key factor to consider will be the entry points for DeFi users, including stablecoins and centralized cryptocurrency platforms, the FSB said, adding:
“The FSB could reduce the risks inherent in closer interconnection by imposing additional prudential and investor protection requirements on these crypto asset classes and entities or by increasing enforcement of existing requirements. We may consider whether
The FSB believes that both asset-backed stablecoins like Tether (USDT) and algorithmic stablecoins like Dai (DAI) can be used to buy, settle, trade, lend and borrow other crypto assets. We emphasized that it plays an important role within the DeFi ecosystem. The rise of stablecoins could increase the adoption of DeFi solutions by retail and corporate users, and could also drive adoption of crypto assets as a means of payment, regulators have suggested.
“Stablecoins are a key area of focus when it comes to the issue of liquidity and maturity mismatch,” the FSB wrote, adding that various stablecoins are being monitored for the risks they pose to the crypto industry, including the DeFi ecosystem. It emphasizes the need to understand the properties of coins.
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The news comes amid heightened scrutiny of several major stablecoins by global regulators. Blockchain infrastructure platform Paxos Trust Company announced on February 13 that it will stop issuing the Binance USD (BUSD) stablecoin amid an ongoing investigation by New York regulators. The New York Department of Financial Services has ordered Paxos Trust to stop issuing BUSD, claiming BUSD is an unregistered security.