DeFi is ripe for regulation before the ecosystem becomes more popular, the Basel-based organization says in its quarterly report.
Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Central bank institution, BIS, says ‘The decentralization in DeFi just an illusion’
BankingDive | Robin Bradley | Dec 7, 2021
DeFi is ripe for regulation before the ecosystem becomes more popular, the Basel-based organization says in its quarterly report.
“The point raised in the special feature is that there’s a limit to how far you can run a whole financial system purely based on those automated transactions,”
CoinDesk reports Hyun Song Shin, economic adviser and head of research at BIS, said during a press briefing.
The Basel, Switzerland-based organization's paper refers to DeFi as “the financial applications run by smart contracts on a blockchain,” which is typically a permission-less chain. DeFi aims to cut down on the rents accrued by intermediaries in traditional finance.
See: DeFi is next on regulators’ hit list
The report argues that central premise of boosting efficiency by reducing private intermediation has yet to be realized, and the high degree of anonymity afforded by DeFi along with limitations in anti-money laundering and know-your-customer (KYC) provisions, expose the sector to illegal activities and market manipulation.
BIS makes the case that the “De” in “DeFi” is just an illusion, since all DeFi platforms include central governance frameworks. For example, governance tokens are often integrated into DeFi projects to afford voting power to individuals. Those holding governance tokens can vote to influence the project in various ways, and become part of a body known as a decentralized autonomous organization (DAO).
It is this element of centralization that may give policymakers the ability to regulate the DeFi ecosystem. The report mentions that, in Wyoming, DAOs have been allowed to register as limited liability companies since mid-2021. Such a legal designation gives policymakers new tools to regulate the ecosystem.
See: As regulators circle above, how should the DeFi industry respond?
BIS is an international institution owned by 63 central banks that represent countries comprising roughly 95% of the world’s gross domestic product. BIS operates as both a global forum and a bank for central banks.
Recently, it partnered with the Federal Reserve Bank of New York to launch a new innovation center, which will support research on central bank digital currencies.
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