The Financial Stability Board (FSB) of the G20 announced on Thursday that it would take action to address “vulnerabilities” and data gaps in decentralized finance (DeFi), both of which were brought to light by the failure of the crypto exchange FTX in the previous year. The rapidly expanding and unregulated section of the financial industry known as DeFi facilitates the buying, selling, and borrowing of crypto assets through the use of public blockchains to record transactions.
In a report to ministers from the Group of 20 (G20) major economies convening next week, the FSB stated the following: “The fact that crypto-assets underpinning much of DeFi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialize, as recent incidents demonstrate.”
Enhancing FSB’s Existing Recommendations for Regulating Crypto
According to the report, FSB member nations will now “proactively” evaluate DeFi vulnerabilities as part of their routine monitoring of crypto markets. The report added that future policy responses might include regulatory and supervisory restrictions regarding the direct exposures of traditional financial institutions to DeFi.
The report added that the collapse of FTX in November 2022 highlighted weaknesses in intermediaries and DeFi. Given the absence of openness and transparency in these markets, the biggest implications of this failure, especially on DeFi projects that were owned by FTX or relied on it for trading flows, would take time to become evident, according to the report.
The FSB stated that it would also investigate the tokenization – or digital representation – of real assets, which might strengthen connections between crypto markets like DeFi and the broader financial system and economy. According to the report, the FSB’s existing recommendations for regulating cryptocurrencies may need to be expanded to account for threats posed by DeFi. Members of the FSB will also examine how DeFi activities could be brought within existing regulations for traditional finance.
