The Bank of England has begun to look for ways to manage the risks posed by decentralized finance, the rapid initial growth of “DeFi” applications.
DeFI refers to a decentralized algorithm-based financial service that relies on smart contracts and is provided through the DLT platform without intermediaries.
Currently, the most prominent use of DeFi is the provision of credit. Currently, lending occupies almost half of the DeFi market.
However, you can deploy DeFi models and technologies to replicate various financial services such as savings, transactions, insurance and derivatives. DeFi is currently very small, but it is growing very rapidly, from less than $ 10 billion in early 2020 to nearly $ 100 billion last month.
Bank of England Governor Jon Cunliff said the highly decentralized global structure of the DeFi sector and the difficulty of tracking end users poses unique challenges for regulators.
“Even in the initial view, it’s clear that this sector is opaque and complex, with risky financial activities, that is, activities regulated by the traditional financial sector,” he says. “Given the lack of provisions for investor protection, AML and other market integrity, there are obvious challenges to market integrity.”
He points out that even with such provisions in place, no one may be accountable with the involvement of regulators.
“In the extreme, the DeFi platform is completely decentralized, with no identifiable legal entity, ownership, or even human contact,” Cunliffe said. “DeFi is still in its infancy, but due to its rapid growth, regulators are asking domestic and foreign regulators about the risks of a wide range of financial services affected through the DeFi platform and how they can be reliably managed with DeFi. We need to take it seriously. The world has the same standards as traditional financial management. The Bank of England has begun to work to this effect. ”
Bank of England looks into the opaque world of DeFi
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