IMF Report: DeFi Poses Risks to Financial Markets, Needs Regulation

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In Brief
  • The IMF considers DeFi a risk to global financial stability, especially as it grows more interconnected with the traditional financial system.

  • It suggests that stablecoins and centralized exchange be the focus of supervision.

  • Stablecoins and other areas of DeFi are increasingly becoming a cause for concern for governments.

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The International Monetary Fund (IMF), in its latest Global Financial Stability report, marks DeFi as a concern for global markets. The IMF believes that it poses financial stability risks and requires regulation.

The International Monetary Fund (IMF) has published a new report on global financial stability, which covers the DeFi market, among other things. The IMF’s Global Financial Stability Report for Apr. 2022 largely focuses on the financial stability risks that the conflict in Ukraine has imposed on the global economy, but also devotes attention to sovereign-bank nexus in emerging markets and “risky business segments” in fintech.

While admitting that fintech can increase efficiency, foster competition, and broaden access to financial services, the IMF states that inadequate regulation and “interconnectedness with the traditional financial system” can have financial stability implications. Specifically, with respect to the crypto space, it refers to digital banks and DeFi.

The organization calls for regulations for DeFi, with the focus being on stablecoin issuers and centralized exchanges. The latter two have been common talking points in regulatory discussions, and stablecoins, in particular, have been subject to much scrutiny. Centralized exchanges, meanwhile, have been regulatory updating policies and business practices as dictated by the changing regulatory landscape.

The IMF worries that the unregulated DeFi landscape poses market, liquidity, and cyber risks — worries that have been put forward many times before. It notes that the absence of centralized entities in the DeFi space makes effective regulation and supervision difficult.

So instead, the IMF asks that regulators turn their attention to stablecoins and centralized exchanges to exact some control on the space. Additionally, it suggests that authorities

“encourage DeFi platforms to be subject to robust governance schemes, including industry codes and self-regulatory organizations. These entities could provide an effective conduit for regulatory oversight.”

DeFi already a high priority for regulators

DeFi does, in fact, continue to be something of a wild west in the market. The 2017 ICO boom saw regulatory hammers slam down on the market, but DeFi has been much harder to control. Its unprecedented and sheer decentralized nature of it has made creating a cohesive regulatory framework difficult for authorities.

But there’s no question that lawmakers will focus their attention on the DeFi market going forward, especially given the rate of adoption and growth in the past two years. Stablecoins look to be among the highest priorities for countries, especially since some believe the sector can threaten national sovereignty.

However, it will be another task altogether when it comes to unhosted wallets. There has been a lot of news on this lately, but the DeFi space is standing firm on its ground.

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Rahul's cryptocurrency journey first began in 2014. With a postgraduate degree in finance, he was among the few that first recognized the sheer untapped potential of decentralized technologies. Since then, he has guided a number of startups to navigate the complex digital marketing and media outreach landscapes. His work has even influenced distinguished cryptocurrency exchanges and DeFi platforms worth millions of dollars.

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