While decentralized financial technologies—such as distributed ledgers or online peer-to-peer platforms—can benefit the financial system, they are also likely to pose many regulatory and supervisory challenges, according to a report released today by the Basel, Switzerland-based Financial Stability Board.
The FSB flagged several financial stability risks that could arise as these technologies become more widely adopted, including new forms of concentration risk, greater procyclicality, diffused or unclear responsibility and accountability, and recovery and resolution challenges. “If the cumulative effects of—and interaction between—these risks were to cause market participants to lose confidence in financial markets, this may also increase risks to financial stability,” the report cautioned.
From a regulatory standpoint, the FSB raised concerns that the nature of decentralized technologies could make it easier for users to avoid regulation or engage in misconduct, while creating enforcement challenges for regulators and increasing jurisdictional uncertainty. The report emphasized the need for early engagement and coordination between regulators and industry stakeholders as these technologies are developed, nothing that it “might help ensure that regulatory and other public policy objectives are considered in the initial design of technical protocols and applications. This should help limit the emergence of unforeseen complications at a later stage.” Read the report.