The US’ Financial Stability Board (FSB) has outlined new measures it will carry out to explore the risks of DeFi.
This comes following a new report published by the FSB on the financial stability risks of decentralised finance (DeFi). This report was delivered to the February G20 Finance Ministers and Central Bank Governors meeting.
DeFi is used to describe services in crypto-asset markets that aim to replicate some functions of the traditional financial system in a decentralised manner.
The report found that while the processes to provide services are in many cases novel, DeFi does not differ substantially from traditional finance in the functions it performs or the vulnerabilities to which it is exposed.
It stated that the specific features of DeFi might result in some of the vulnerabilities, such as operational fragilities, liquidity and maturity mismatches, leverage and interconnectedness, play out differently than in traditional finance.
It stated the fact crypto-assets underpinning much of DeFi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialise.
The extent to which the vulnerabilities can lead to financial stability concerns, it said, depends on the interlinkages and transmission channels between DeFi, traditional finance and the real economy.
While these interlinkages are limited, if the DeFi ecosystem grows significantly, the scope for spillovers would increase.
Based on the findings of its report, the FSB has outlined some additional actions.
The first of these is to analyse the growth and implications of the tokenisation of assets, for example, the creation of a digital representation (token) of a financial instrument or real asset, as it could increase linkages between crypto-asset markets/DeFi, traditional finance and the real economy.
The FSB will also explore approaches to fill data gaps to measure and monitor interconnectedness of DeFi, in collaboration with standard-setting bodies (SSBs) and regulatory authorities.
Another measure will see the FSB examined recommendations for the international regulation of crypto-asset activities.
Last year, the FSB established proposals to ensure greater convergence in cyber incident reporting.
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