The lack of regulation and good governance in the cryptocurrency sector is more than an obstacle for businesses and a lack of protection for users, it is an existential threat, said Carolyn Wilkins, external member of the Financial Policy Committee of the Bank of England, in a talk on October 19. Decentralized finance (DeFi) would be a good starting point to get things in order, he said.
Speaking at the University College London Center for Blockchain Technologies, Wilkins said that The most common scam complaints reaching the Financial Conduct Authority, the UK’s financial regulator, concern cryptocurrencies. In addition to that financial risk, investors are also concerned about reputational risk, which Wilkins says is present in DeFi in abundance.
Today, UCL CBT hosted the talk given by Carolyn Wilkins @wilkinscarolyna on’#governance of “#decentralized” Finance: Get up, Stand up!’.
For more information, visit https://t.co/G5ie2who1y pic.twitter.com/b9colxbUdx—UCL CBT (@uclcbt) October 19, 2022
Wilkins considered the concentration of power in “whales” in DeFi to be a source of risk. Across the top 10 Proof-of-Stake platforms by market capitalization, the top 50 validators hold between 47% and 100% of the holdings, he noted. At the same time, there is a lack of transparency in accountability. This tension is observed in the case of Ooki in the United States. Wilkins said:
“We live in an inherently uncertain world. That means there can never be one set of smart contracts for every situation, and centralized decision-making will always be necessary when the unexpected happens.”
However, it is not always clear when such centralized decision-making is needed or who will carry it out. Cryptocurrencies need to get into shape quickly as regulated traditional finance is also embracing blockchain technology and may go for some market share of the crypto industry. Wilkins said:
“Regulated traditional finance firms are increasingly applying the underlying blockchain technology to traditional capital markets. They will be in a better position to capture this market if the crypto industry doesn’t get its house in order, if only because they have better known and tested governance”.
Wilkins pointed to JPMorgan’s Onyx blockchain trading network and collateral management platform HQLAX as examples of the threat hanging over them.
Regulators are acting, albeit slowly, and the industry can help, Wilkins said. It recommended “industry-led mechanisms that develop codes of conduct and best practices,” regular audits of the codes and “disclosure of how the rights to change the code are determined and who holds the ‘compromise keys'”.
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