The Fed called the DeFi sector a potential threat to financial stability

The Fed called the DeFi sector a potential threat to financial stability

The Fed called the DeFi sector a potential threat to financial stability

With the growth of cryptocurrency market capitalization, the DeFi sector may create long-term risks to financial stability. This was stated by the experts of the FRS research group.

According to analysts, the threat is related to the lack of clear rules for regulating decentralized applications. In a published study, they noted that the sector has not yet become “systemically important”, but government departments need to pay more attention to it.

“The rapid growth of the role of [programmable ] blockchain suggests that policymakers should begin to seriously consider the full range of financial stability issues that could arise if such activities become systemically important,” the document says.

The Fed stressed that regulators do not have the necessary tools to enforce laws and regulations in DeFi. According to experts, sector players will “seize any and all profitable opportunities, regardless of the fears of the supervisory authorities.” 

The Fed also published a separate study on the impact of digital assets on financial stability. Analysts noted the need for stricter control over crypto companies that work with client funds.

“Surveillance, comprehensive disclosure, and capital and liquidity requirements where appropriate can increase the resilience of organizations in the digital asset ecosystem. For example, centralized entities that act as counterparties to retail users generally do not have capital, liquidity or comprehensive disclosure requirements,” the report says.

According to analysts, the cryptocurrency industry is “prone to accumulating financial vulnerabilities.” However, the Fed called the risks to economic stability “minor”. The reason is the limited interconnection of digital assets with the traditional market.

“If the digital financial system becomes more interconnected with the traditional one or expands the scope of financial services, these risks can quickly become significant,” they added.

Recall that in July 2022, Fed Vice Chairman Lael Brainard called for tighter regulation of the cryptocurrency industry.