The U.S. Financial Stability Board (FSB) has outlined new actions that it will take to investigate the risks associated with decentralized financing (DeFi). The FSB recently released research on the threats to financial stability posed by DeFi, stating that DeFi and traditional finance are very similar.
DeFi and Traditional Finance: Similarities in Risks
DeFi refers to services offered on crypto-asset marketplaces that seek to reproduce certain aspects of the traditional financial system in a decentralized manner. According to the FSB’s paper, while the methods used to deliver services are unique, the tasks DeFi performs and the risks it is exposed to are similar to those of traditional finance.
The report highlights various vulnerabilities in DeFi, including operational fragilities, liquidity and maturity mismatches, leverage, and interconnectedness. These vulnerabilities could manifest differently than they would in traditional finance due to the unique characteristics of DeFi.
The potential for spillovers would arise if the DeFi ecosystem were to expand dramatically, even though there are few connections between these systems. To address these concerns, the FSB has recommended extra measures.
The first is to examine the expansion and consequences of asset tokenization, which involves developing a digital representation token of a financial instrument or actual asset. This may strengthen ties between crypto-asset markets, conventional finance, and the real economy.
Additionally, the FSB will work with regulatory agencies and standard-setting organizations (SSBs) to investigate methods for bridging data gaps to assess and track DeFi’s interconnection. The FSB’s suggestions for the global regulation of crypto-asset operations will be another action that is being considered.
Last year, the FSB established measures to ensure better consistency in reporting cyber incidents. The regulatory agency claims that the primary elements of this framework are recommendations that support the coherence and comprehensiveness of regulatory, supervisory, and oversight approaches to crypto asset activities and markets. It also aims to strengthen global cooperation, coordination, and information sharing.
The FSB’s decision to investigate the risks associated with DeFi shows that regulatory agencies are taking the emerging industry seriously. It highlights the need for more robust regulation to protect investors and ensure the stability of the financial system. As the DeFi ecosystem continues to grow and evolve, it will be interesting to see how regulators respond and adapt to these changes.