The G20 Financial Stability Board (FSB) said Thursday it would take steps to address “vulnerabilities” and data gaps in decentralized finance (DeFi) highlighted by the collapse of cryptocurrency exchange FTX last year.
The fast growing and unregulated DeFi The segment offers trading, lending and lending of cryptocurrency assets by using public blockchains to record transactions without central control.
“The fact that crypto-assets, which underpin much of DeFi, have no intrinsic value and are highly volatile amplifies the impact of these vulnerabilities when they materialize, as recent incidents demonstrate,” the FSB said in a report the ministers of the Group of 20 (G20). Meeting of the major economies next week.
FSB member countries will now “proactively” analyze DeFi vulnerabilities as part of regular monitoring of crypto markets, the report said.
“Possible policy responses may include, for example, regulatory and supervisory requirements related to traditional financial institutions’ direct exposures to DeFi,” it said.
The collapse of FTX Vulnerabilities in intermediaries and DeFi were uncovered last November, the report said.
“The full extent of the impact of this failure, including on DeFi projects owned or dependent on FTX for trade flows, will take time to become apparent given the lack of disclosure and transparency in these markets,” reads in the report.
gaps in supervision
The most worrying vulnerability in DeFi relates to “imbalances” in liquidity from different maturities of liabilities and assets, the report said.
Some DeFi arrangements could be “deliberately” cross-border to exploit gaps in regulation, hence the need for international coordination, she added.
Until the sharp drop in bitcoin prices and the FTX crash, regulators had largely focused on cryptoassets rather than related technologies.
The FSB said it will also explore tokenization — or digital representations — of real-world assets, which could strengthen the links between crypto markets and DeFi with the broader financial system and economy.
The FSB’s existing recommendations on regulating cryptoassets may need to be expanded to cover risks from DeFi, the report said.
FSB members will also explore how DeFi activity could fall under existing mainstream funding rules.
“If DeFi activities and entities are deemed to fall within the scope of regulation, enforcement of compliance with applicable regulations is warranted,” the report states.
New policies may be needed for DeFi activity outside of existing rules, it said.
© Thomson Reuters 2023
