Featured Product

    FSB Report Assesses Financial Stability Risks of Decentralized Finance

    February 16, 2023

    The Financial Stability Board (FSB) published a report that examines the financial stability risks of decentralized finance (DeFi). The report analyzes the decentralized finance ecosystem, identifies vulnerabilities associated with decentralized finance, and outlines work to be done to address these vulnerabilities.

    The report highlights that, within the crypto-asset ecosystem, decentralized finance (DeFi) has emerged as a fast-growing segment. Decentralized finance is an umbrella term commonly used to describe a variety of services in crypto-asset markets that aim to replicate some functions of the traditional financial system (TradFi) while seemingly disintermediating their provision and decentralizing their governance. This report, which was delivered to the February G20 Finance Ministers and Central Bank Governors meeting, concludes that decentralized finance does not differ substantially from traditional finance in the functions it performs or in terms of the vulnerabilities to which it is exposed; however, the processes to provide such services are in many cases novel. These vulnerabilities associated with decentralized finance include operational fragilities, liquidity and maturity mismatches, leverage, and interconnectedness. The report highlights that the extent to which these vulnerabilities can lead to financial stability concerns largely depends on the interlinkages and transmission channels between decentralized finance, traditional finance, and the real economy. These interlinkages have so far been limited, as shown by the modest impact of the May/June 2022 crypto-asset market turmoil and the November 2022 FTX collapse on traditional finance.

    However, if the decentralized finance ecosystem were to grow significantly and become more mainstream, as a result of the broader adoption of crypto-assets and the development of real-world use cases, then interlinkages would deepen and the scope for spillovers to traditional finance and the real economy would increase. Based on these findings, FSB will conduct additional work to:

    • analyze the growth and implications of the tokenization of assets—that is, the creation of a digital representation (token) of a financial instrument or real asset—as it could increase linkages between crypto-asset markets/decentralized finance, traditional finance, and the real economy.
    • explore approaches to fill data gaps to measure and monitor the interconnectedness of decentralized finance with traditional finance, with the real economy, and with the crypto-asset ecosystem, in collaboration with standard-setting bodies and regulatory authorities.
    • examine the extent to which the FSB-proposed policy recommendations for the international regulation of crypto-asset activities may need to be enhanced to acknowledge decentralized finance-specific risks and facilitate the application and enforcement of rules.
    • assess the regulatory perimeter across jurisdictions, in coordination with the standard-setting bodies, to determine which decentralized finance activities and entities fall or should fall within that perimeter.
    • possibly consider whether to subject such decentralized finance entities to additional prudential and investor protection requirements or to step up enforcement of the existing requirements.

    FSB and the standard-setting bodies can play an important role in such perimeter assessments as well as in strengthening cross-border cooperation and data-sharing.  FSB is well-placed to analyze and advise on cross-sectoral and cross-border issues, including how to promote effective cooperation with respect to crypto-asset supervision and regulation.


    Related Links

    Keywords: International, Banking, Regtech, Decentralized Finance, Financial Stability, Systemic Risk, Fintech, Tokenization, Crypto-Assets, Blockchain, FSB 

    Featured Experts
    Related Articles

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News

    EBA Updates Address Securitization Standards and DGS Guidelines

    The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.

    February 21, 2023 WebPage Regulatory News

    FSB Publishes Letter to G20, Sets Out Work Priorities for 2023

    The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023

    February 20, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8793