Two papers examining decentralized finance (DeFi) and the effects of digital assets on financial stability were released last week by the research division of the US Federal Reserve.
In light of the crypto industry’s connections to the larger financial sector, the Fed and its leadership have pushed for increased regulation of the sector. The authors of their study on financial stability made regulatory recommendations in the context of tighter scrutiny for businesses handling client cash.
The study concluded that “oversight, thorough disclosures, and capital and liquidity requirements, where appropriate, might strengthen the resilience of businesses within the digital asset ecosystem.” For instance, centralized crypto entities acting as counterparties to retail users inside the digital asset ecosystem are typically exempt from capital, liquidity, or thorough disclosure requirements.
The crypto ecosystem is “prone to the buildup of financial vulnerabilities,” according to the stability paper’s conclusion, but it also stated that “financial stability risks are not extensive because the digital asset ecosystem does not provide significant financial services and its interconnections with the traditional financial system are limited.”
Still, the authors highlighted that such dangers might increase in the future.
Financial stability risks might swiftly become serious, they put up a warning. Should the digital financial system become increasingly integrated with the traditional system or increase its provision of financial services.
An extensive analysis of the DeFi ecosystem is given in the study “Decentralized Finance (DeFi): Transformative Potential & Associated Risks.” It highlights the possibility for long-term stability risks while pointing out the enormous growth of the cryptocurrency industry.
Since the invention of bitcoin, a lot has changed in the manner that financial services are provided on open, permissionless blockchains, but DeFi has not yet developed to the point where it is systemically significant, according to the authors. However, the swift expansion of these blockchains’ influence urges that authorities begin paying close attention to a wide range of financial stability risks that can surface should such activities become systemically significant.
Source: https://www.thecoinrepublic.com/2022/09/04/federal-reserves-research-paper-highlighting-cefi-and-defi-risks/