By Shelly Melancon (Switzerland)
The Bank Of International Settlements (BIS), in a post on their official website, disclosed that the idea of decentralization in the decentralized finance sector was an illusion. The hub for central banks around the world announced this in the post, chronicling the growth of the emerging industry. The BIS said that many incorrectly believe that the platforms are decentralized. It says that a majority of the operations are centralized.
Details Of The Report
The report posted yesterday evaluates the growth of non-bank go-betweens and offers insights to aid regulators and lawmakers. The evaluation placed a lot of emphasis on decentralized finance and the risk it poses to financial stability. The decentralized finance industry wants to allow people to engage in more efficient financial transactions by taking the place of financial services providers like banks. The market is valued at over $140 billion, making many gains this year.
The Risks DeFi Pose And Its Centralized Nature
The evaluation shows that decentralized finance systems necessitate established governance in the long run. The BIS says that ceilings exist to how far the system can be operated solely on automated transactions. The economic adviser and head of research at BIS, Hyon Song Shin, said that there would be points when decentralized finance needs restructuring or reevaluation. He says none can tell how long the system can continue to run like this, and it is something to look out for.
The BIS also disclosed that the confirmation structures built into blockchain sometimes concentrated power. This loophole makes it possible for few participants to decide big issues. The evaluation notes that regulators can leverage the existing default structures within DeFi in setting policy.
The Bank says that the proliferation of decentralized finance could be dangerous for global financial stability as its flaws will become more pronounced. The Bank fears that the combination of increased leverage, imbalances in liquidity, domino-style interconnectedness, and lack of buffers like Banks could be a recipe for disaster.
The reports note, however, the threat to the financial system remains minimal for now. The BIS reveals that though the DeFi ecosystem grows rapidly, it remains mostly isolated. The thereat lies in DeFi becoming mainstream.
Regulatory Insights
The BIS says that while many believe the decentralized nature of DeFi makes it difficult for regulators to know who should be held accountable, they posit that full decentralization remains a myth. The BIS cites DeFi governance tokens as an element that could lift the veil on the centralized aspects of DeFi. The governance tokens embody voting rights on DeFi platforms.
Those who possess these tokens have sway in influencing actions on these platforms. The tokens are used to vote on issues concerning the platform. The heads of decentralized platforms are called Decentralized Autonomous organizations (DAO). A DAO can run many decentralized platforms at a time.
The existence of these DAOs can make it possible for these DeFis to become entities recognized and bound by the law. The BIS believes that these DAOs can be made to register as LLCs. Hyon Song Shin reveals that three issues could be engaged by regulating DAOs; ensuring consumer rights, blocking criminal activities, and ensuring financial stability.
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