Global standard setters will join forces 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, a report published on Thursday said.

The FSB will also examine the extent to which the proposed policy recommendations for the crypto sector need to be improved 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 connection between DeFi and traditional finance.

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

Regulators around the world have been monitoring how interconnected the crypto space has been with the real economy as companies and banks dove into the sector during the crypto boom that began in 2021. Since then, billions have been wiped from crypto markets and led to subsequent collapses including token issuer Terra, crypto lender Celsius Network and the crypto exchange FTX. The market turmoil has only encouraged regulators to put in place better safeguards for people investing in crypto.

FSB is no exception. In December, it promised to look into DeFi-specific risks and vulnerabilities. It also proposed a framework for international regulation of crypto activities in October. The FSB said on Thursday that it expects to publish the final cryptoregulatory framework in July.

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

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

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

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