Powell, Lagarde call for more regulation for DeFi and Stablecoins

Christine Lagarde of the CBA, Jerome Powell, the head of the Federal Reserve System, and the general manager of the BIS Agustin Carstens took part in an online panel hosted by the Bank of France on Tuesday to share his thoughts on decentralized finance (DeFi) agreeing to provide a wider regulation in the sector.

According to Bank of International Settlements (BIS) General Manager Carstens, one of the big problems is that DeFi in its current form is mostly about “self-referential” transactions that are unrelated to real-life transactions.

“DeFi applications facilitate borrowing, lending and trading, but intermediaries are also exposed to traditional risks such as liquidity, counterparty risks and leverage risk, which DeFi has no infrastructure to deal with,” Carstens said.

According to Carstens, DeFi applications essentially have secured regulations and therefore stablecoins “It’s the grease on the wheels in DeFi”. However, collateral is often ineffective, governance of many DeFi transactions is not well established, and they largely depend on “exchange houses” that do too much at once without proper segregation of duties and accountability. , and appropriate management, he stressed.

All this leads Carstens to believe that DeFi has “structural problems and “internal weaknesses”, so it is not surprising that we will see some stability problems in the sector – something that the BIS boss worries him most about.

US Federal Reserve Chairman Jerome Powell, meanwhile, said that the recent normalization of monetary policy that we’ve seen around the world has only exposed significant structural problems in the DeFi ecosystem, but that doesn’t seem to be the case as the tide goes out. now let it be a real problem.

The real question, according to Powell, is whether there are larger structural problems in the DeFi ecosystem, including a lack of transparency.

“I think the good news is that from a financial stability perspective, the interaction between the DeFi ecosystem and the traditional banking system is not that big at this point. We’ve seen the DeFi movement, but it hasn’t had a significant impact on broader financial stability,” Powell said.

However, the Fed chairman said that this situation “will not continue indefinitely” and that “we need to be very careful about how these cryptocurrency activities are conducted within the regulatory perimeter.”

“Anyway, everywhere [these crypto activities] As DeFi expands and begins to touch more and more retail customers, there is a real need for more appropriate regulation,” said Powell.

DeFi is ‘a completely different animal’

Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), emphasized the importance of distinguishing between the different components of the crypto ecosystem and the types of risks and benefits each of them poses.

“For example, if you look at tokenized assets, there are a lot of banks that are experimenting with that. They pose less risk, but they are not a dominant part of the ecosystem, although that is where the real potential lies,” said Menon.

The other component is actual cryptocurrencies, “I don’t see any redeemable value for that,” he said.

“Speculation about these cryptocurrencies has led to price swings that have nothing to do with the underlying economic value,” Menon said.

According to him, DeFi is “a completely different animal” and the biggest problem is that he doesn’t see where the rules can be applied because the protocols are decentralized.

“In a decentralized world, you can’t do that with an algorithm, […] and if that’s something we can pull off, I can see some promise in DeFi. Otherwise, it could be a game-breaker,” Menon said.

European Central Bank President Christine Lagarde, who joined the debate, described cryptocurrencies as a “mysterious phenomenon” that has evolved from a kind of cultural hype pushed by libertarians and promoted by Satoshi Nakamoto to a tool now embraced by PayPal. , Visa and Mastercard.

Lagarde also mentioned the collapsed Terra ecosystem, which “abuses” cryptocurrencies, and its co-founder Do Kwon, who is “on the other side of this mysterious coin,” which she says “provides regulation.”

“If we’re not in this game, if we’re not involved in experimentation, innovation, in terms of digital central bank money, we risk losing the anchor role we’ve played for decades,” Lagarde said.

No “Wild West” scenario was accepted

Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and Capital Markets Union, discussed what tokenization could mean for the financial system, saying that tokenization began as a challenge to disrupt the existing financial system. traditional financial system.

“I think it’s not accidental Bitcoin the network was launched in 2009 amid the financial crisis and mistrust of financial institutions. And I think it’s no surprise that the cryptocurrency markets have exploded since then,” McGuiness said, adding that despite the volatility, the global cryptocurrency market is currently valued at more than $1 trillion.

McGuinness said blockchain technology, which is the basis of crypto protocols, has a lot of potential because it cuts out middlemen and eliminates the need for centralized processes and intermediaries.

“He [the blockchain technology] By recording key data in an immutable format, it can make transactions more efficient and transparent, making it available to all market participants. And it can make payments cheaper, faster and more secure,” said McGuinness.

He added that the technology could also unlock “billions of euros and dollars currently used to cover credit or settlement risk in technology.”

Again, as McGuinness points out, these potential benefits may not play out in a “Wild West” scenario; without regulation, cryptocurrency poses huge risks to the financial system.

With that in mind, in 2023 the European Commission plans to propose legislation for the possible launch of a digital euro that could be given legal tender status like the cash euro, McGuinness said.

Meanwhile, the European Commission is also considering the growth of DeFi.

“This new ecosystem contains both opportunities and risks for firms, the financial system and wider society, so if we are to take advantage of the opportunities, we must address the risks,” McGuinness added.

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