The Banque de France hosted top minds in the Financial Industry for the “Opportunities and challenges of the tokenization of finance” event. The pertinent concerns around DeFi emanate from the fluctuating market cycles that oscillate between bears and the current bullish trend. The industry stakeholders have opined to promote regulation to streamline the nascent industry, which they deem disruptive.
DeFi and Traditional Finance are Divergent
According to Agustín Carstens, the general manager of the Bank for International Settlements (BIS), decentralized and traditional finance vary. The contrast poses a colossal challenge for regulators who increasingly find it daunting to cope with the dynamic scope of Crypto and Blockchain. For instance, the Ethereum upgrade has transitioned the mainnet from the Proof of Work (PoW) consensus mechanism to the Proof of Stake (PoS) model.
Carstens further adds that Crypto’s borderless and global nature inhibits effective regulation. The global community of bankers is working on a harmonized framework of Crypto and blockchain regulation.
In the virtual meeting, speakers such as Commissioner McGuinness delved into Stablecoins and the recent collapse of Terra Luna. He, however, stated that financial crises such as the 2009 event and the current economic turmoil strengthen the expansion of DeFi.
DeFi’s Integration in the Finance Industry is Rising
Jerome Powell, the Reserve Bank chair, says that retail customers are increasingly adopting Crypto. The proportion of DeFi in the industry remains low, and the risks of a Crypto winter cannot devastate the economy.
Nonetheless, the rapid integration of Digital Currencies and traditional finance calls for increased effort in streamlining regulation to manage the risks inherent in the Crypto industry.
At the end of 2021, the TVL peaked at $62 billion per a DefiLlama report. As the market capitalization recovers to $1 trillion, the DeFi total-value locked (TVL) remains low after plummeting by 71% in 2022. However, long horizon projections show that the value of DeFi in finance will grow as the Crypto market matures and adoption increases.
The Biden Whitehouse is Setting the Pace for DeFi Regulation
The Biden administration is opting to promote the use of Decentralized Finance instead of disincentivizing its adoption. There is also a bipartisan Crypto bill in Congress, and the Crypto stakeholders are confident that the outcome will favor the industry.
Further, the USA is mulling developing a Central Bank Digital Currency in the footsteps of China. The Federal Chair says that should the CBDC come into effect; the agency will ensure full compliance with identity verification of users to fight financial crimes.
Meanwhile, the American administration is bureaucratic, and any policy change can take years to implement and operationalize. By then, DeFi would have transitioned, and policymakers would need to return to the drawing board.