Global Standard Setters Will Team Up to Tackle DeFi Regulation: FSB

The Financial Stability Board (FSB) will work with other international standard setters to determine how decentralized finance (DeFi) activities should be regulated across different jurisdictions, it said in a report published Thursday.

The FSB will also explore the extent to which its proposed policy recommendations for the crypto sector needs to be enhanced to address risks specific to DeFi, the report said. In collaboration with other international standard-setters, it also plans to explore how to fill data gaps in measuring and monitoring the interconnectedness of DeFi with traditional finance.

“DeFi does not differ substantially from traditional finance in the functions it performs or the vulnerabilities to which it is exposed,” the FSB said in a Thursday press release.

Regulators around the world have been monitoring how interlinked the crypto space has been with the real economy as businesses and banks dove into the sector during the crypto boom that started in 2021. Since then, billions have been wiped out from crypto markets and prompted successive collapses including that of token issuer Terra, crypto lender Celsius Network and crypto exchange FTX. The market turmoil has only encouraged regulators to set up better safeguards for people investing in crypto.

The FSB is no exception. In December it vowed to take a closer look at DeFi-specific risks and vulnerabilities. It also proposed a framework for the international regulation of crypto activities in October. The FSB said on Thursday that it expects to publish its final crypto regulatory framework in July.

“The FSB may consider whether subjecting these crypto-asset types and entities to additional prudential and investor protection requirements, or stepping up the enforcement of existing requirements, could reduce the risks inherent in closer interconnections,” the report said.

Although its findings show that the interlinkages between DeFi, the real economy and traditional finance are limited, “if the DeFi ecosystem were to grow significantly, then the scope for spillovers would increase,” the FSB said.

The body said it will carry out additional work to analyze the implications of asset tokenization which it says could increase linkages between the DeFi market and the real economy.

Operational fragilities, liquidity and maturity mismatches and leverage make the DeFi sector vulnerable, the FSB said.

Read more: Financial Stability Watchdogs Vow to Tackle DeFi, Learn FTX Lessons