European Central Bank: “DeFi Needs to Be Effectively Supervised and Regulated”
The European Central Bank (ECB) communicated its perspective on the growing sector of Decentralised Finance (DeFi), as well as the broader crypto ecosystem. The bank recently stated that effective supervision of DeFi as a finance sector is required, as well as specific regulatory frameworks.
International Coordination and Cooperation
In a recent article the ECB noted that the massive growth in the adoption and use cases of sectors of the crypto industry calls for a stern look into the space. It is important to be able to control any risks it might pose to financial stability. The article entitled “A Deep Dive Into Crypto Financial Risks: Stablecoins, DeFi, And Climate Transition Risk” highlights that Financial stability risks stemming from crypto-assets are rising, and the crypto-asset ecosystem is becoming more complex. If today’s trends continue, crypto-assets will pose a threat to global financial stability. This is why supervision and effective market regulation are required.
The ECB also mentioned that policymakers will have challenges enforcing terms of regulation and supervision in DeFi. The reason lies in the anonymity within the space and the absence of traditional centralised entry points. Hence, “an internationally coordinated approach” is required to allay risks posed by DeFi.
The article cited the collapse of Terra stablecoin as an argument in favour of imposing supervision and regulation over DeFi. Although investors are still assured that stablecoins are meant to be devoid of the volatility of regular crypto assets, the fall of Terra’s UST shows, “stablecoins may not be so stable after all.”
Future Risks and Perspectives in DeFi
The point issued by the ECB has found support by the Bank of England. The recent Financial Stability Report of July 2022 states that tablecoins do not pose a threat to financial stability as of now. However, certain risks and threats may appear, especially if regulatory frameworks are not established at the opportune time.
“Enabling responsible innovation to flourish will require that the regulatory perimeter encompass the crypto financial system according to the principle of like risk, like regulatory outcome, and that novel risks associated with the new technologies be appropriately addressed. It is important that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system,” – from Bank of England Conference of July 8, 2022.