Huw Jones

LONDON (Reuters] – If decentralised financing catering for cryptoassets gains traction, financial stability could be undermined. According to Monday’s quarterly review by the Bank for International Settlements, more safeguards were needed.

DeFi platforms, also known as cryptoassets or stablecoins allow you to borrow, lend and save without having to go through traditional financial gatekeepers like banks.

DeFi can be used to supplement traditional financial activities. However, it has very few real-economy applications and supports speculation across many cryptoassets.

DeFi, a Swiss-based global forum for central bankers, stated that the limited application of anti money laundering rules and customer checks along with transactions anonymity exposes it to illegal activities, market manipulation and other financial crimes.

DeFi’s principal premise, to lower costs by eliminating intermediaries, is not yet realized.

According to the BIS, “There’s a decentralisation illusion in DeFi because the need for governance makes some amount of centralisation necessary and structural aspects lead to a concentration power.”

“DeFi’s potential vulnerabilities could undermine financial stability if it becomes widespread.”

Major investors have bet heavily on the growth of the sector, with Canadian pension fund Caisse de Dépôt et Placement du Québec in October taking part in a $400 million investment in major lending platform Celsius Network.

(Graphic: DeFi BIS Graphic 1, https://fingfx.thomsonreuters.com/gfx/mkt/jnpweaewdpw/DeFi%20BIS%20Graphic%201.PNG)

The BIS stated that if DeFi risks aren’t managed well, stablecoins could be prone to run and potential fire sales of assets backing them. This could result in funding shocks for banks and companies, which would feed through into the wider financial system.

The report stated, “DeFi has many of the same challenges as traditional finance. Therefore, it is possible to use established regulatory principles for guidance.”

(Graphic: DeFi BIS Graphic 2, https://fingfx.thomsonreuters.com/gfx/mkt/zgvomnmrgvd/DeFI%20BIS%20Graphic%202.PNG)