The Bank for International Settlements (BIS) has identified DeFi as a potential threat to the financial system and urged governments to develop legislation to regulate the sector as soon as possible.
The BIS report says that “the complete decentralization of DeFi is an illusion.” Governance tokens that give voting power in decentralized systems shatter this illusion. Holders of such tokens can influence the DeFi project by voting on proposals or changes in the governance system. That being said, the governing bodies, Decentralized Autonomous Organizations (DAOs), can control multiple DeFi projects.
“This element of centralization can serve as the basis for the recognition of DeFi platforms by corporate-like entities. For example, DAOs can be registered as limited liability companies, as in the state of Wyoming, ”the report says.
BIS claims DeFi needs centralized management. The report notes that “DeFi’s inherent governance structures are natural starting points for public policy.” Given the rapid growth of the sector, BIS recommends that governments develop legislation to regulate the sector as soon as possible.
The authors of the report consider DeFi a “self-sufficient” sector, and its potential to disrupt the financial system is low. However, if DeFi becomes widespread, its “severe vulnerabilities” could undermine financial stability. These vulnerabilities can arise from lending programs without intermediaries or liquidity problems in stablecoins, which usually facilitate transactions in DeFi applications.
In June, the BIS Basel Committee on Banking Supervision announced a public consultation on cryptoasset regulation. Then, in early October, the bank called for regulating stablecoin transactions as payments with fiat currencies. At the end of October, BIS recommended that states choose less risky financial technologies than stablecoins to solve economic problems.
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