In its latest quarterly report, the Bank for International Settlements analyzed DeFi’s growth and its possible implications for the global financial system.
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The Bank for International Settlements (BIS) says the decentralized finance (DeFi) space has a centralization problem and has supported the idea of stricter oversight.
In its quarterly review report, the the world’s central banking body, examined the growing DeFi reviewing its implications for the financial system, and offered a perspective on possible regulation. The news mediaCoinDesk,Reuters yFinancialTimes reported on the publication.
Technology-basedBlockchain a distributed ledger system. A sequence of blocks, or units of digital information, stored consecutively in a public database. The basis for cryptocurrencies.DeFi platforms allow users to access financial services such as loans and savings without the need for central institutions such as banks. The sector has grown rapidly in the last 18 months. At the time of going to press, DeFi has close refers to the closing price; similar to the same term used in stock trading. to USD $250 billion of total value locked up (TVL), or funds pledged as collateral; this is more than 1,200% higher than a year ago.
Illusion of decentralization the handover of control from a central authority to several different custodians.
The BIS highlighted in its report that DeFi has the potential to complement traditional financial activities, but currently has few uses in the real economy. It added that for the most part, it supports speculation and arbitrage arbitrage is the practice of quickly buying and selling the same asset in different markets to take advantage of price differences between the markets. in multiple cryptocurrencies.
On the other hand, it argued that the limited application of supervisory measures such as anti-money laundering (AML) rules and customer controls (KYC), along with the anonymity of transactions, exposes DeFi to illegal activities and market manipulation. The global banking forum asserted along these lines that DeFi has a “absolute necessity“of centralized governance.
There is an ‘illusion of decentralisation’ in DeFi, as the need for governance in the world of cryptocurrencies, governance is defined as the people or organizations that have decision-making powers regarding the project. makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power.
During a conference on Monday, the economic advisor and head of research at BIS, Hyon Song Shin, added that he considers ” there is a limit to the extent to which an entire financial system can be managed based solely on such automated transactions “. In his view, there will be times when DeFi protocols will need to be reorganized.
“ I think it’s an open question how far this project can be taken without that kind of centralized a centralized organizational structure is one in which a single node or a small number of them are in control of an entire network. orientation.Creo que es algo que claramente tendremos que vigilar con mucho cuidado “, Shina said. The media CoinDesk quoted the consultant’s words.
On the other hand, the report also pointed out that the trend in the consensus consensus is achieved when all participants of the network agree on the order and content of the blocks in the blockchain. mechanisms of the Blockchain Concentrating power could make it easier for a small number of stakeholders to make big decisions.
DeFi could affect financial stability
Si bien el informe del BIS señaló que DeFi es “freelancer“and said its potential to disrupt the financial system in general remains low, the banking forum cautioned that if the use of these platforms becomes widespread, it could have repercussions for the financial system.
“ If DeFi a movement encouraging alternatives to traditional, centralized forms of financial services. were to become widespread, its vulnerabilities could undermine financial stability. “ said BIS.
The report further warned that loans through DeFi platforms are often over-collateralized, meaning that a potential loan is less than the value of the assets used as collateral. “Funds borrowed in one case can be reused as collateral collateral is any asset that a lender accepts as a form of security to ensure that the borrower repays a loan. for other transactions.“, the report said.
This creates a cycle in which leverage money that a trader borrows from a brokerage, enabling them to gain far greater exposure to a position than what their capital allows. allows more assets to be purchased for the initial capital, the report said. When debt eventually needs to be reduced, investors are forced to dispose of these assets, putting downward pressure on prices.
This is the first time that the BIS has issued a cautious note on the DeFi markets, although it has previously highlighted the risks in around stable currencies, which are the assets widely used in this space. In this opportunity, the BIS again warned about the ” vulnerabilities “of the stablecoins . Stable currencies such as the Tether (USDT) . risk liquidity how easily a cryptocurrency can be bought and sold without impacting the overall market price. mismatches ” because they are backed by commercial paper, which are ” short-term securities with illiquid secondary markets “, the report stresses.
The review also warned that stablecoins like DAI, which are backed by cryptoassets, are “exposed to market an area or arena, online or offline, in which commercial dealings are conducted. risk, because the value of these assets can quickly fall below the nominal value of stable currenciesnone
DAO: a regulatory possibility
The paper also suggested a possible solution that could help DeFi to break the illusion of decentralisation. The BIS said that DeFi could take advantage of the tokens governance which are cryptocurrencies that represent voting power in decentralized systems; as well as other decentralized decentralization refers to the property of a system in which nodes or actors work in concert in a distributed fashion to achieve a common goal. governance systems such as the DAOs. (decentralized autonomous organization).
The banking forum stressed that this form of organization could also represent a possible approach to make it easier for regulators to oversee the space. “This element of centralization can serve as a basis for recognizing DeFi platforms as legal entities similar to corporations.“said the BIS. The authors of the report mentioned the Wyoming legislation (United States) which allows the legal registration of DAOs as limited liability companies.
These groups, and the governance protocols on which their interactions are based, are natural entry points for policymakers.
For his part, Shin explained that there are three areas that regulators could address a place where cryptocurrency can be sent to and from, in the form of a string of letters and numbers. through these centralized organizational bodies. These include consumer protection, protection against money laundering and criminal activity, and financial stability, to what extent the DeFi ecosystem will overlap with the conventional financial system.
“ Then there is the question of how we think about these new institutions, these new arrangements as part of the financial market infrastructure. “The BIS adviser said. The report added that these entry points should allow public authorities to contain the risks associated with DeFi before the industry grows too large while encouraging innovation and allowing the potential benefits of the sector to be explored.
Regulatory safeguards would also help ensure that DeFi’s innovative potential delivers overall benefits to finance.
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Article by Hannah Estefania Perez /DiarioBitcoin
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