FSB to more closely scrutinize decentralized finance

The Financial Stability Board on Thursday laid out several steps it will take in the future to evaluate and possibly reduce the financial stability risks posed by decentralized finance, or defi. In a report, the board said that by attempting to replicate some of the functions of the traditional financial system, defi inherits and may amplify the vulnerabilities of that system. “The fact that cryptoassets underpinning much of defi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialize, as recent incidents demonstrate,” according to FSB.

First, the FSB will proactively analyze the financial vulnerabilities of the defi ecosystem as part of its regular monitoring of the wider cryptoasset markets, the report said. Second, the board, in collaboration with standard-setting bodies and regulatory authorities, will explore approaches to fill data gaps to measure and monitor the interconnectedness of defi with traditional finance. Third, the FSB will explore the extent to which its proposed policy recommendations for the international regulation of cryptoasset activities may need to be enhanced to acknowledge defi-specific risks.

The report also suggested the FSB consider assessing the regulatory perimeter across jurisdictions to determine which defi activities and entities fall—or should fall—within that perimeter or outside of it. “In this respect, a key element to consider would be the entry points of defi users (including retail investors and traditional financial institutions), such as through stablecoins and centralized cryptoasset platforms,” the report said. “The FSB may consider whether subjecting these cryptoasset types and entities to additional prudential and investor protection requirements, or stepping up the enforcement of existing requirements, could reduce the risks inherent in closer interconnections.”