DeFi a threat to the international financial system according to the FSB

At least since the declaration of war by SEC boss Gary Gensler, it has been clear: DeFi is a thorn in the side of the established supervisory authorities. Because truly decentralized protocols are currently very difficult to integrate into the traditional legal structures of many countries. Central contact points that can be regulated are often missing in the DeFi space. DeFi protocols such as Uniswap, SushiSwap, Compound and Aave, for example, do not have permanent headquarters, but are developed jointly by decentralized working groups.

The service of truly decentralized DeFi protocols is therefore difficult to regulate. The service can thus be compared to collective goods that can be used by anyone at any time without restrictions. It is obvious that this leads to criminals also using these platforms. Mainly because of this, regulators around the world want to crack down on DeFi more and more.

“DeFi is undermining the established financial system”

It is therefore all the less surprising that the Financial Stability Board (FSB) has now also become aware of DeFi. The international organization is responsible for overseeing the global financial system. It advises the politicians of the twenty most important industrialized and emerging countries (G20) on legislation in the financial world. In a new one report which the FSB published on February 16, the international organization warns that DeFi protocols could undermine trust in the global financial system because they could be seen as an alternative to established financial structures.

However, the FSB sees the greatest risk in the use of stablecoins in DeFi protocols. The watchdog believes the lack of laws, market oversight and low cybersecurity standards pose a serious threat to the global financial system. As the Council writes:

As the sector continues to grow in size, the severity of these vulnerabilities could impact the functioning and confidence in the financial system in general.

Since many of these DeFi protocols are extremely dependent on individual stablecoins, the FSB believes that the failure of one could set off a chain reaction.

Many stablecoins are used for token trading, borrowing and lending. The collapse of a single stablecoin could thus unbalance the entire crypto market. Additionally, it could result in liquidity suddenly being constrained in the broader crypto ecosystem, disrupting trading and potentially leading to violent market liquidations spilling over into the global financial system.

Regulating stablecoins as a top priority

The FSB therefore intends to continue to monitor the development and risks in the DeFi market and closely monitor the measures that the FSB countries have taken or intend to take to counter the associated threats to the financial system.