Decentralized finance for crypto-assets built on an illusion, according to the BIS

LONDON, Dec.6 (Reuters) – Decentralized finance for cryptoassets could undermine financial stability if it gains traction and more collateral is needed, the Bank for International Settlements said in its quarterly review on Monday.

So-called DeFi platforms allow users to lend, borrow and save, typically in the form of cryptoassets and stablecoins, while bypassing traditional and centralized gatekeepers of finance such as banks.

DeFi has the potential to complement traditional financial activities, but it currently has few uses in the real economy and, for the most part, supports speculation and arbitrage across multiple crypto-assets, the BIS said in its review. quarterly.

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Limited enforcement of anti-money laundering rules and customer controls, along with anonymity of transactions, exposes DeFi to illegal activity and market manipulation, the Switzerland-based World Central Bank Forum said. Read more

DeFi’s main premise of cutting costs by cutting out middlemen still seems to be realized, the BIS added.

“There is an ‘illusion of decentralization’ in DeFi because the need for governance makes some level of centralization inevitable and structural aspects of the system lead to a concentration of power,” said the BIS.

“If DeFi were to become mainstream, its vulnerabilities could undermine financial stability.”

Large investors have bet heavily on the growth of the sector, the Canadian pension fund Caisse de Dépôt et Placement du Québec having participated in October in a $ 400 million investment in the large loan platform Celsius Network.

DeFi BIS Graph 1

If DeFi risks are not well managed, stablecoins are subject to leaks and possible inflammatory sales of the assets that support them could generate financing shocks for companies and banks, spilling over into the financial system in the sense large, said the BIS.

“Since DeFi’s main challenges resemble those of traditional finance, established regulatory principles can serve as a compass,” he said.

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DeFi BIS Graph 2

Reporting by Huw Jones; Editing by Simon Cameron-Moore

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