FSB to Address Vulnerabilities in Decentralized Finance

Addressing DeFi Vulnerabilities

The G20's Financial Stability Board (FSB) has announced measures to address vulnerabilities and data gaps in decentralized finance (DeFi), particularly highlighted by last year's collapse of the cryptocurrency exchange FTX. DeFi, an unregulated and rapidly growing sector, facilitates trading, borrowing, and lending of cryptocurrency assets via public blockchains without central control. The FSB emphasizes the inherent lack of value and high volatility of the crypto-assets underpinning DeFi, which exacerbate the impact of these vulnerabilities.

Proactive Monitoring and Policy Response

FSB member countries are set to proactively analyze these vulnerabilities as part of their ongoing crypto market monitoring. Potential policy responses could include regulatory and supervisory requirements for traditional financial institutions with direct exposure to DeFi. The FTX collapse exposed significant vulnerabilities in DeFi and intermediary systems, highlighting the need for greater transparency and disclosure.

Supervision and Liquidity Mismatch

A major concern in DeFi is the liquidity mismatch between assets and liabilities of varying maturities. Some DeFi arrangements may intentionally operate cross-border to exploit supervision gaps, underscoring the necessity for international regulatory coordination. Previously, regulatory focus was mainly on crypto-assets rather than the underlying technology.

Tokenization and Regulatory Enhancements

The FSB plans to explore the tokenization of real assets, which could strengthen the connection between crypto markets and traditional financial systems. Current recommendations for regulating crypto-assets might require enhancement to address DeFi risks. FSB members will investigate integrating DeFi activities into existing financial regulation frameworks.

Future Regulations and Compliance

For DeFi activities falling within the regulatory scope, compliance enforcement is deemed necessary. However, for those activities outside current regulations, new policy frameworks may be required. The FSB's ongoing efforts aim to ensure stability and mitigate risks in the evolving DeFi landscape.