Cryptoassets - cryptocurrencies.
DeFi enables the lending and borrowing of cryptoassets without using a central exchange.
DeFi services are algorithmic-based services that rely on smart contracts and are delivered over distributed ledger technology platforms without intermediaries.
DeFi is an alternative system to CeFi. CeFi facilitates lending and borrowing cryptoassets through an exchange.
- DeFi and crypto-assets present significant risks for traditional markets
- "Both DeFi and crypto-asset activity is taking place in markets generally with lack of the traditional safeguards around market integrity, consumer and investor protection and financial stability.
- At the same time, increased interest in, and adoption of, digital assets by traditional financial sector players and institutional investors has been observed, coupled with increased supply of products and services providing access to crypto-asset risk.
- Such ‘institutionalisation’ of crypto-assets could merit the attention of policy makers given that part of the activity is happening in a non-compliant manner or outside the perimeter of existing regulatory and supervisory frameworks, exposing participants and the markets to significant risks.
- Institutionalisation of crypto-assets and DeFi-TradFi interconnectedness - OECD - May 2022.
- DeFi's regulatory challenges
- "The highly decentralised and global structure of the DeFi sector along with the difficulty to trace end users provide a unique set of challenges for regulators.
- Even on an initial view it is clear that the sector is opaque, complex and undertakes financial activities that carry risk – activities that are regulated with the traditional financial sector.
- ... the degree of decentralisation currently varies across platforms.
- However, in an extreme form, a DeFi platform could be completely decentralised with no identifiable legal entity, ownership nor even a point of human contact.
- DeFi is still in its early infancy but its rapid growth means that regulators, domestically and internationally, need to think seriously now about the risks of a broad range of financial services being effected through DeFi platforms and how to ensure risks are managed in the DeFi world to the same standards as they are managed in traditional finance."
- Is 'crypto' a financial stability risk? - Bank of England - Jon Cunliffe, Deputy Governor, Financial Stability - October 2021.
- DeFi's channels of risk transmission
- "Although the size of the DeFi market itself is not large enough to be considered a risk to the stability of the markets, the DeFi space is still worth delving into as it is growing rapidly, attracting an increasing number of retail and institutional investors alike.
- Increased interest and adoption of cryptoassets by institutional investors and other traditional financial service providers in particular is leading to increased interconnections between CeFi and the parallel DeFi system and creates channels of risk transmission to the traditional markets and potentially the real economy."
- OECD Symposium on Digitalisation and Finance in Asia - discussion paper - 2021.
- Improving the DeFi ecosystem - Blockchain Governance Initiative Network (BGIN)
- "Ultimately, the objective of BGIN is to take a leading role in the development of a healthy governance system for decentralised finance.
- The main components of such multi-stakeholder governance include common language, enhanced transparency, and multilateral stewardship, harmonisation of technology, business and law.
- The network’s stakeholders cultivate common understanding, enhance dialogue, and work together to make a significant positive impact on the decentralised finance ecosystem and to society more broadly.
- The network aims to contribute to public policy design and implementation through such constructive communication with global standard-setters and jurisdictional regulatory, supervisory and enforcement authorities."
- BGIN Terms of Reference - 2020.
- Bank of England
- Blockchain Governance Initiative Network (BGIN)
- Centralised finance (CeFi)
- Complex problem
- Cryptoasset exchange
- Crypto-assets = cryptoassets
- Decentralised exchange
- Distributed ledger
- Financial intermediary
- Financial stability
- Horizon scanning
- Organisation for Economic Co-operation and Development (OECD)
- Real economy
- Risk evaluation
- Risk transmission
- Smart contract
- Systemic risk