Acknowledging that DeFi would soon expand into the retail space, the Federal Reserve Chair, Jerome Powell, called for the regulation of DeFi.
However, he stated that the regulation should be made carefully and thoughtfully, given its impact on the real economy. However, policymakers are keen on the regulation of the DeFi space following the collapse of the terraUSD stablecoin.
Significant Structural Issues
Jerome Powell, the Chair of the U.S. Federal Reserve, today talked about the growth and expansion of decentralized finance (DeFi). He also talked about its impact on the traditional financial ecosystem and called for its regulation before it expands into retail. Powell was speaking during the “Opportunities and challenges of the tokenization of finance” event, organized by the Banque de France on the 27th of September.
“Within the DeFi ecosystem, there are these very significant transparency, lack of transparency [issues],”
Appropriate Regulations The Need Of The Hour
Powell acknowledged that the interaction between DeFi and the traditional banking system has been limited, which has helped minimize the impact of the ongoing “DeFi Winter.” However, he stated that this limited interaction was enough to demonstrate the weaknesses and the work required to frame appropriate DeFi regulations moving forward.
“The monetary policy normalization that we’re seeing all over the world, all it did was reveal … significant structural issues in the DeFi system, and conflicts of interest. All of those things have been revealed now that the tide has gone out. We need to be very careful about how crypto activities are taken within the regulatory perimeter, where ever they take place […] there is a real need for more appropriate regulation.”
The Federal Reserve Chair also stated that he preferred applying the same rules of conventional finance to DeFi, going by the mantra of “same risks, same regulations.” He also suggested applying the same to several novel features such as decentralized governance, replacing intermediaries with code, and using unhosted crypto wallets, which help to facilitate money laundering.
No Rush To Introduce CBDCs
Powell also revealed that there was no rush to introduce central bank digital currencies (CBDCs), stating that they have decided not to proceed with the idea for now and don’t see any real decision for some time due to the move requiring approval from both Congress and the executive.
“We have not decided to proceed, and we don’t see ourselves as making that decision for some time. We’re evaluating both the policy issues and the technology issues, and we’re doing that with a very broad scope.”
BIS And European Commission Raise Concerns
Powell’s comments followed concerns raised by the Bank of International Settlements (BIS) general manager, Agustin Carstens, who voiced concern about the stark contrast between decentralized finance and traditional finance. Carsten stated that one challenge central banks and regulators face is the borderless nature of crypto and DeFi.
Mairead McGuinness also called for international cooperation in framing new rules for cryptocurrencies and DeFi. McGuinness stated,
“Decentralized finance challenges some of the fundamental aspects of the financial system as it currently exists. The [European] Commission is monitoring the developments and risks in this fast-moving area very closely.”
Other bankers were far more skeptical of the crypto space and were quite critical, with the Singapore Monetary Authority’s Ravi Menon stating that he does not see any redeeming value in cryptocurrencies. European Central Bank’s Christine Lagarde cited the collapse of terraUSD to push for stronger regulation of the sector, stating that Satoshi Nakamoto’s crypto dream has been abused.
“Mr. Do Kwon, who is on the run, is the other side of that enigmatic coin, which warrants the regulation that has been advocated by both Jay and Ravi.”
