G20 targets decentralized finance after FTX crash

By Huw Jones

LONDON, Feb 16 (Reuters) – The G20 Financial Stability Board said on Thursday it would take action to address “vulnerabilities” and data gaps in decentralized finance highlighted by the platform’s bankruptcy FTX exchange last year.

The fast-growing, unregulated segment of decentralized finance (known as DeFi) provides trading, lending, and borrowing services for cryptocurrency assets using public blockchains to record transactions , without central control.

“The fact that the crypto assets that underpin much of DeFi are inherently worthless and highly volatile amplifies the impact of these vulnerabilities when they materialize, as recent incidents demonstrate,” says the Financial Stability Board. (FSB) in a report. addressed to the ministers of the main economies of the Group of 20 (G20) who will meet next week.

According to the report, FSB member countries will now “proactively” scan for DeFi vulnerabilities as part of regular monitoring of cryptocurrency markets.

“Potential policy responses may include, for example, regulatory and supervisory requirements regarding traditional financial institutions’ direct exposures to DeFi,” the report notes.

The FTX debacle that took place last November exposed vulnerabilities in brokers and DeFi, according to the report.

“The extent of the repercussions of this bankruptcy, even on DeFi projects owned or used by FTX for trade flows, will take time to become apparent given the lack of disclosure and transparency in these markets,” the report said. .

GAPS IN SUPERVISION

DeFi’s most worrying vulnerability relates to liquidity “mismatches” resulting from different maturities of liabilities and assets, according to the report.

Some transactions on DeFi may be “deliberately” cross-border to take advantage of gaps in supervision, hence the need for international coordination, he added.

Until the sharp drop in Bitcoin prices and the FTX crash, regulators had largely focused on crypto assets rather than related technology.

The FSB said it would also look into the tokenization – or digital representation – of real assets, which could strengthen the links between the cryptocurrency and DeFi markets with the wider financial system and economy. .

According to the report, the existing FSB recommendations for the regulation of crypto assets may need to be enhanced to cover DeFi risks.

Members of the Financial Stability Board will also explore how DeFi activities could be included in existing rules for conventional finance.

“While DeFi activities and entities are deemed to fall within the regulatory perimeter, compliance with applicable regulations is ensured,” the report states.

For DeFi activities that fall outside the current rules, new rules might be needed.

(Reporting by Huw Jones; Editing in Spanish by Flora Gómez)