The central bank of central banks is worried about “decentralized finance.”
The Bank for International Settlements, an umbrella group for central banks, said in a report this week that it’s concerned there’s a “decentralization illusion” in DeFi.
DeFi is a rapidly-growing part of the cryptocurrency market that promises to deliver traditional financial products like loans and savings accounts without involvement from regulated middlemen such as banks.
Regulators, on the other hand, are growing concerned about platforms that offer DeFi services that may not be as “decentralized” as they claim.
“What we found is that, first and foremost, the decentralized part tends to be elusive,” Agustin Carstens, the BIS’s general manager, told CNBC’s Julianna Tatelbaum Tuesday.
“There are certain motivation concerns relating to the fact that, as a result of this decentralization, you wind up with some agents who play a significant role, and not always in the best [interests] of financial service consumers.”
The central bank group did not name any specific individuals in connection with its concerns.
DeFi, according to the BIS, must be “fully regulated” to protect investors and increase market trust.
Timo Lehes, a co-founder of Swarm Markets, a decentralized crypto exchange, acknowledged that there was still work to be done in DeFi, but stated that several institutions in the area are actively trying to address the systemic challenges raised by the BIS.
“At some point, each protocol will have to decide whether or not to move to a compliant business model,” Lehes wrote in an emailed message on Tuesday.
“Operating under regulatory frameworks created to safeguard investors and ensure market access has a lot of benefits.”
Many DeFi services are built on Ethereum, the blockchain network that powers ether, the second-largest cryptocurrency in the world. Transactions are facilitated by so-called smart contracts, which use lines of code to automate certain processes.
According to data from crypto news and research business The Block, more than $100 billion is currently languishing on Ethereum-based DeFi protocols. Maker, Curve, and Compound are three of the most popular platforms in the space.
The promise of high returns on loans and savings is enticing investors to DeFi sites. However, hackers and fraudsters are increasingly targeting them. According to blockchain analytics startup Elliptic, DeFi frauds and thefts have cost over $10 billion so far in 2021.
The BIS considers that the dangers associated with DeFi are presently limited to crypto markets, but that “the rise of DeFi poses financial stability concerns” in the future.
The group identified “serious” flaws in the business, such as excessively leveraged trades, liquidity concerns, and a lack of shock absorbers like banks.
“It’s critical that we don’t become complacent as authorities,” Carstens remarked. “There may be certain things that are safe, but there are also some that are not, and I believe that should cause us to think again.”
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