The world’s top central bankers, Jerome Powell of the United States Federal Reserve Chairman, Christine Lagarde the President of the European Central Bank (ECB), and Agustín Carstens, the General Manager of the Bank for International Settlements (BIS) are looking into regulating decentralized finance (DeFi). During a panel discussion on digital finance hosted by Banque de France, the attendees shared and tackled their views on DeFi. They acknowledged and urge that broader DeFi regulation is essentially needed.
Structural Issues Are Driving DeFi Regulation
As stated by Powell, from the perspective of financial stability, the relationship between the DeFi ecosystem and traditional banking and financial system was not substantial at this time. However, Powell emphasized that there were “very significant structural issues around the lack of transparency” in the DeFi ecosystem. He also mentioned that should a U.S. central bank digital currency (CBDC) be launched, it would not be anonymous and would include identity verification for users.
Meanwhile, Carstens stated that DeFi is primarily about self-referencing transactions that aren’t tied to real-life transactions and its applications rely on collateralized arrangements. He also pointed out that the “exchange houses”, which do too many things simultaneously, lack proper segregation, accountability, and appropriate governance are a major problem.
Furthermore, he said that DeFi is not equipped to handle risks like liquidity, counterparty, and leverage. Since DeFi applications facilitate borrowing, lending, and trading to different intermediaries. Carstens underlined that the huge challenge facing central bankers and regulators is that the DeFi and crypto are global and borderless.
Crypto Activities Must Operate Within Regulatory Perimeter
Powell recognized that DeFi is reaching more retail customers and as DeFi expands, he highlighted that regulations are indeed necessary to protect consumers. He said careful considerations must be taken on how these crypto activities operate within the regulatory perimeter.
Lagarde expressed cryptocurrency as an enigmatic phenomenon. She elaborated that it evolved from being a cultural hype advocated by Satoshi Nakamoto and pushed by libertarians to becoming an instrument that is accepted by PayPal, Visa, and Mastercard.
As DeFi rise as one of the fastest-growing sectors in the crypto space, the world’s top central bankers, have expressed their concerns and agreed that DeFi regulation is crucial in the evolving global financial system.