The financial institution highlighted the risks of DeFi in terms of liquidity and security. He asked to regulate them but acknowledged that it is difficult since they are decentralized platforms.

The International Monetary Fund (IMF) ruled on decentralized finance protocols (DeFi) and highlighted the need to regulate this environment. The main struggle of these networks, according to the agency, is the lack of liquidity. In contrast, the lack of a centralized supervisory entity and various regulatory uncertainties mean that the traditional regulatory intention does not work in this space.

This IMF perspective on DeFi protocols, which are based on smart contracts to bring financial services such as loans and investments (among others) without intermediation, was revealed in the Global Financial Stability Report report.

The topic of DeFi appears in chapter 3 of the document, which got entitled The rapid growth of fintech: Vulnerabilities and challenges for financial stability.

The most prominent struggle about the IMF observing in DeFi gets linked to an inadequate framework for liquidity management, which gets brought by investors and could become scarce in stressful periods.

In addition, although it suggests regulating in this sector, the agency acknowledges that the lack of centralized entities that deal with DeFi represents an obstruction to its regulation and supervision.

The report expressed that these decentralized financial services networks should become subject to robust governance regimes. Government authorities might become responsible for granting this context and encourage public-private contributions to set up self-regulatory organizations.

Another previous publication on the blog of the financial institution also highlights that DeFi includes the accumulation of purchases and presents a particular sensitivity to the market, liquidity, and cybersecurity risks.

On this last point, the text warns that cyberattacks can become a fatal factor for these networks because they extract their currencies and decline their confidence.

The lack of a deposit guarantee in DeFi fuels the idea that all deposits are at risk; however, this is not the case because these protocols usually need the placement of crypto active as collateral, such as bitcoin or another cryptocurrency.

The Growth Moment of DeFi According to the IMF

To describe DeFi and the context they go through, the agency assured in its report that these platforms have had extraordinary growth and that although they increase efficiency and investment opportunities, “they pose market and security risks.”

According to IMF’s view, technology entities focused on finance started to occupy the field of traditional banks, and their regulation should focus on features that could enable the ecosystem of digital currencies.

The IMF and its Stance Regarding Bitcoin

It is not the first time that the International Monetary Fund has defended its stance regarding Bitcoin, cryptocurrencies, and technology. These demonstrations have always had the goal of discrediting or requesting more effective regulations in all these sectors.

The IMF asked Argentina to take “anti-Bitcoin” procedures to refinance the country’s debt with the entity. This request may happen again in the entity’s negotiations with other administrations.

By: Jenson Nuñez


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