The Bank for International Settlements (BIS) identified key financial stability risks of DeFi and suggested a focus on regulating stablecoins, as their growing adoption could increase DeFi acceptance by members of the traditional finance market.
The Financial Stability Board (FSB), one of the BIS regulators, calls for international rules for the decentralized finance market (DeFi) that focus primarily on using stablecoins. That’s what the FSB said in a report on DeFi’s financial stability risks.
The FSB analysts argue that DeFi’s functionality “does not differ substantially” from TradFi. However, DeFi increases the potential vulnerabilities of the traditional finance market by using new technologies that are simply not properly regulated. Therefore, the FSB insists on setting standards and rules for participants of the DeFi sector to prevent financial stability risks.
The regulator’s main focus is on the stablecoin market. The FSB analysts believe that stablecoins play an important role in the DeFi ecosystem through their use in buying, trading, lending, and borrowing other crypto-assets. Stablecoins could be the primary bridge between DeFi and TradFi.
Recall that representatives of commercial banks suggested considering deposit tokens as a more stable and reliable alternative to stablecoins.
The FSB report states that the right approach to regulating the stablecoin market will increase the adoption of DeFi technology by retail and corporate users, as well as facilitate the acceptance of crypto-assets as a means of payment. The regulator’s focus will be on understanding the characteristics of various stablecoins. This will provide productive monitoring of the risks they pose to the DeFi ecosystem, the crypto industry, and the traditional finance market.
Regulators from the U.S. are also interested in stablecoins. For example, the New York Department of Financial Services (NYDFS) forced Paxos Trust Co. to stop issuing BUSD, which negatively affected the crypto exchange Binance.
