“DeFi Needs To Be Effectively Supervised And Regulated”

The European Central Bank (ECB) has communicated its perspective on the growing sector of Decentralised Finance (DeFi) as well as the broader crypto-asset ecosystem. The bank recently stated that effective supervision of DeFi as a finance sector is required and that the area needs specific regulatory frameworks.

The ECB wants an internationally coordinated approach to regulating DeFi

In an article dubbed, “A Deep Dive Into Crypto Financial Risks: Stablecoins, DeFi, And Climate Transition Risk”, the ECB highlighted that the massive growth in the adoption and use cases of sectors of the crypto industry calls for a stern look into the space in order to control any risks it might pose to financial stability.

“Financial stability risks stemming from crypto-assets are rising, and the crypto-asset ecosystem is becoming more complex and interconnected,” the report says, further adding, “if current trends continue, crypto-assets will pose risks to financial stability. Crypto-asset markets thus need to be effectively regulated and supervised.”

The ECB also mentioned that policymakers will have challenges enforcing terms of regulation and supervision in DeFi due to the anonymity within the space and the absence of traditional centralized entry points; hence, “an internationally coordinated approach” is required to allay risks posed by DeFi.

The article also cited the crash of Terra’s UST as a major factor behind the significance of supervision and regulation, noting that, while investors are made to believe stablecoins are meant to be devoid of the volatility of regular crypto assets, the fall of Terra’s UST shows, “stablecoins may not be so stable after all.”

The BoE also thinks crypto assets could pose a financial risk in the future if not regulated

Recall that the Bank of England’s Financial Policy Committee, in its Financial Stability Report of July 2022, pointed out that while crypto assets – including stablecoins – currently do not pose a risk to financial stability, there is the possibility of that happening in the foreseeable future, especially if regulatory frameworks are not established at the opportune time.

Cryptocurrencies – an idea that started in 2008 is taking the traditional final system by storm with the massive rate of growing adoption fueled by macroeconomic policies and currency devaluation. The world is heading towards a financial crisis, and the crypto gospel says crypto is the answer.

Due to this growing adoption, it has become a thing of utmost importance to establish definite regulatory frameworks in order to define the terms of use of crypto-assets so as to avoid financial risks that would emanate from an uncontrolled environment.