(CoinDesk) Problems of over-collateralization and regulation will slow down decentralized finance despite exponential growth in recent years, according to Morgan Stanley.
Morgan Stanley says that over-collateralization in borrowing or lending means that DeFi does not expand the money supply for the same cryptocurrencies. They warn that this key attribute will make it difficult for DeFi to act as an alternative to the conventional fractional reserve banking approach.
The bank warns that regulators have in the past been slow to catch up with the DeFi boom. The strategists note that regulatory scrutiny will widen given the risks to the financial system, posing a challenge to the protocol growth.
The strategists fault the absence of know-your-client information in DeFi, which limits the institutional uptake. They warn that KYC requirements will make DeFi more centralized.
Morgan Stanley says it does not see much evidence of DeFi protocols performing more efficiently than the current system. Instead, the strategists say that DeFi protocols have been used to attract cash flow which ends up benefiting the protocol operators.
Following the concerns, Morgan Stanley says DeFi will remain relatively small in the coming years.
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