BIS-funded regulator to probe DeFi entry points like stablecoins

The Financial Stability Board (FSB), a financial regulator funded by the Bank for International Settlements (BIS), is pushing international rules for decentralized finance (DeFi).

FSB February 16 published a report on the financial stability risks of DeFi, highlighting the main vulnerabilities, transmission channels, and the evolution of DeFi.

The report states that despite providing many “new” services, DeFi “does not differ significantly” from traditional finance (TradFi) in terms of its functions. By trying to replicate some of TradFi’s features, DeFi increases potential vulnerability due to the use of new technologies, highly interconnected ecosystems, and lack of regulation or compliance, according to the FSB.

Moreover, the actual degree of decentralization in DeFi systems “often differs significantly” from the stated requirements of the founders, the authorities said.

To prevent the financial stability risks associated with DeFi from developing, the FSB is partnering with global standard-setting bodies (SSBs) to evaluate DeFi regulations in multiple jurisdictions.

Monthly unique DeFi addresses and number of DeFi applications. Source: FSB

In this regard, a key element to consider will be entry points for DeFi users, including stablecoins and centralized cryptoasset platforms, the FSB said, adding:

“The FSB may consider whether applying additional prudential and investor protection requirements to these types of crypto assets and entities, or strengthening compliance with existing requirements, could mitigate the risks inherent in closer relationships.”

The FSB emphasized that both asset-backed stablecoins like Tether (USDT) and algorithmic stablecoins like Dai (DAI) play an important role in the DeFi ecosystem through their use in buying, settling, trading, lending and borrowing. other crypto assets. The regulator suggested that the rise of stablecoins is also likely to increase the adoption of DeFi solutions by retail and corporate users, as well as facilitate the use of crypto assets as a means of payment.

“In terms of liquidity mismatch and maturity issues, stablecoins are a critical area of ​​focus,” the FSB writes, emphasizing the need to understand the specifics of various stablecoins in order to track the risk they pose to the crypto industry, including DeFi ecosystems.

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The news comes amid growing attention from global regulators to some of the major stablecoins. On Feb. 13, blockchain infrastructure platform Paxos Trust Company announced it was halting the issuance of Binance USD (BUSD) stablecoins amid an ongoing investigation by New York City regulators. The New York City Department of Financial Services has ordered Paxos Trust to stop issuing BUSD, alleging that BUSD is an unregistered security.

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