On Feb 16, the Financial Stability Board (FSB) released a report on the financial risk associated with the decentralized finance (DeFi) ecosystem, in which the authority outlined possible DeFi vulnerabilities and indicators to monitor the problems.
The report was delivered to the February G20 Finance Ministers and Central Bank Governors meeting. It states that some DeFi features may lead to critical vulnerabilities, including operational fragilities, liquidity and maturity mismatches, leverage, and interconnectedness.
Without naming the single entity, the international regulatory authority highlighted the recent turmoil in the crypto space that depicts the highly volatile nature of cryptocurrency. The authority could be a referring collapse of the giant crypto exchange, FTX.
According to the assessment report, the major factors that prompt threats to financial stability largely depend on the interlinkages and transmission channels between DeFi, traditional finance, and the real economy.
The report states, “To date, these interlinkages are limited. However, if the DeFi ecosystem were to grow significantly, then the scope for spillovers would increase.”
In the report, the FSB explained indicators to tackle down DeFi vulnerabilities and monitor transmission channels to secure a regulated market. FSB will follow these indicators to dig the roots of the DeFi ecosystem.
These indicators ask to analyze the growth and implications of the tokenization of assets, fill data gaps to measure and monitor the interconnectedness of DeFi, coordinate with the standard-setting bodies (SSBs) and regulatory authorities, and examine FSB’s policy proposal for international regulation.
Following the last year’s assessment reports, the FSB revealed that it expects to publish its final crypto-asset regulatory framework in July 2023.
