By Hugh Jones
LONDON (Reuters) – The G20 Financial Stability Board (FSB) said on Thursday it would take action 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 segment of DeFi offers the trading, borrowing and lending of cryptocurrency assets using public blockchains to record transactions without central control.
“The fact that the crypto-assets that underpin much of DeFi have no intrinsic value and are highly volatile exacerbates the impact of these vulnerabilities when they materialize, as recent incidents demonstrate,” the FSB report to the Group of 20 ministers said. (G20). meeting of major economies next week.
FSB member states will now “actively” analyze DeFi vulnerabilities as part of their regular monitoring of crypto markets, the report said.
“Potential policy responses could include, for example, regulatory and supervisory requirements regarding the direct exposure of traditional financial institutions to DeFi,” it said.
The collapse of FTX last November exposed the vulnerabilities of intermediaries and DeFi, according to the report.
“The full impact of this failure, including on DeFi projects that owned or depended on FTX for trade flows, will take time to become apparent given the lack of disclosure and transparency in these markets,” the report said.
FSB DeFi Graphic 1 https://fingfx.thomsonreuters.com/gfx/mkt/xmpjkrmoqvr/FSB%20DeFi%20Graphic%201.PNG
Gaps in supervision
The most worrisome vulnerability in DeFi relates to liquidity “mismatches” due to different maturities of liabilities and assets, the report said.
Some DeFi arrangements may be “purposefully” cross-border to exploit oversight gaps, necessitating international coordination, the report added.
Prior to the sharp fall in Bitcoin prices and the collapse of FTX, regulators mainly focused on crypto-assets rather than the related technologies.
The FSB said it will also explore the tokenization – or digital representation – of real-world assets, which could increase the links between crypto markets and DeFi to the wider financial system and economy.
The FSB’s existing guidelines for the regulation of crypto-assets may need to be improved to cover the risks from DeFi, according to the report.
FSB members will also examine how DeFi activities may fall under existing mainstream finance regulations.
“If DeFi activities and entities are deemed to fall within the regulatory perimeter, enforcement of existing regulations is necessary,” the report said.
DeFi activities outside existing regulations may require a new policy, the report said.
FSB DeFi Graphic 2 https://fingfx.thomsonreuters.com/gfx/mkt/mypmokenypr/FSB%20DeFI%20Graphic%202.PNG
(Reporting by Hugh Jones; Editing by Helen Popper)