A global council for securities regulators said on Thursday that decentralised finance, or DeFi, is posing new risks for investors as it matures to resemble regular markets, adding to a chorus of warnings about the fast-growing crypto offshoot.

Crypto offshoot DeFi throws up new risks for investors, global regulators say

DeFi platforms allow users to lend, borrow, and save in digital assets without going via traditional financial gatekeepers like banks and exchanges.

Supporters claim that they provide financial services to a large number of people and businesses who would otherwise be unable to obtain loans or other products. During the COVID-19 epidemic, the DeFi sites grew in popularity as investors sought returns in the face of historically low interest rates.

According to IOSCO, which is made up of securities regulators from the United States, Europe, and Asia, most DeFi services mirror more traditional financial services and activities, but with lower regulation and increased risks for investors.

Risks associated with DeFi, according to IOSCO, include a lack of product and system transparency, inconsistent reliability of DeFi locations, and potential scaling issues.

Professional investors or venture capitalists often have a substantial voice on governance or retain ultimate control, according to IOSCO. DeFi sites claim to be "decentralised," with no single organisation exerting authority.

Furthermore, IOSCO stated that centralised trading platforms that provide DeFi services, such as trading, lending, and borrowing, may have significant conflicts of interest.

The value of crypto on DeFi platforms hit a record of more than $111 billion in November, mirroring record highs for bitcoin, and now stands at around $80 billion, based on data site DeFi Pulse.

Regulation of DeFi, like cryptocurrencies in general, remains patchy, even though the sector is attracting more mainstream investors. DeFi has also been used for scams and other crimes.

The Financial Stability Board, a risk monitoring watchdog for the G20 economies, said last month DeFi could present risks to financial stability without regulation and oversight.

Source: Reuters

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