(BIS) The Bank of International Settlement believes that decentralized finance protocols or DeFi pose a risk to the stability of global financial systems.
The Central Bank says DeFi appears to operate in its own ecosystem, outside the intermediation of the real economy giving rise to potential money laundering and exposing investors.
The institution further adds that stablecoins, which facilitate DeFi, are vulnerable to classic runs and are less liquid reserve assets that can cause downward price spirals.
The institution opines that given the financial stability risks, DeFi needs “systemic regulation” to oversee the activity that is confided outside the traditional financial control.
BIS warns of the growing “illusion” of decentralization of DeFi, saying that the technology needs centralized government for operational and strategic controls. It says some DeFi features such as the consensus mechanism already require concentration of power.
The central bank agrees that DeFi can complement traditional finance but currently carries limited use-cases in the real economy. It says DeFi is, for the most part, supporting arbitrage and speculation, becoming susceptible to price swings and crashes that could spill over to traditional markets.
BIS comments come amid the DeFi boom due to its high-speed transactions at reduced costs. The market cap surged to $143 billion this year in the broader $2.4 trillion crypto market.
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