Key facts:
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 sector. The main problem of these platforms according to the agency is the “lack of liquidity”, while the lack of a centralized supervisory entity and certain regulatory uncertainties mean that the traditional regulatory approach does not work in this environment.
This IMF perspective on DeFi protocols, which rely on smart contracts to offer financial services such as loans and investments (among others) without intermediation, was published in the report “Global Financial Stability Report”. More precisely, the topic of DeFi is touched on in chapter 3 of the document, which is entitled “The rapid growth of fintech: Vulnerabilities and challenges for financial stability”.
The main problem that the IMF observes in DeFi has to do with “an inadequate framework for liquidity management”, which is provided by investors and could become scarce in periods of stress, the document details.
In addition, although it suggests regulation in this area, the body recognizes that the lack of centralized entities that manage DeFi is an obstacle for its regulation and supervision.
The report states that these decentralized financial services platforms should be “subject to robust governance regimes.” Government authorities are responsible for ensuring this context and encourage public-private collaboration to establish “self-regulatory organizations,” says the IMF, .
Other publication A previous post on the financial institution’s blog also points out that DeFi involves the “accumulation of leverage” and are particularly sensitive to market, liquidity and cybersecurity risks. On this last point, the text warns, cyberattacks can be “fatal” for these platforms because they steal their assets and undermine user confidence.
Likewise, it is stated that the “lack of a deposit guarantee in DeFi contributes to the idea that all deposits are at risk.” However, this is not the case because these protocols usually require the placement of a cryptoactive as collateral, such as bitcoin (BTC) 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 an extraordinary growth and that while they increase efficiency and investment opportunities, they “pose market and security risks.”
In the IMF’s view, technology companies focused on finance (known as “fintech”) are beginning to occupy the terrain of traditional banks and its regulation “should focus on aspects that enable the ecosystem of crypto assets, such as stable coin issuers and centralized exchange platforms.” In this sense, the focus should be on “proportionally targeted policies” in fintech and traditional financial companies.
But not all were critical. For the IMF, one of the advantages of fintech —which includes digital banks, fintech companies and DeFi— is that they foster efficiency and competition and promote access to financial services. However, its rapid growth in “risk segments”, along with poor regulation and its interconnection with the traditional financial system, carry certain risks.
The IMF and its views on Bitcoin
It is not the first time that the International Monetary Fund has expressed itself regarding Bitcoin, cryptocurrencies and the technology around them. Almost always these demonstrations have had the purpose of discrediting or requesting increased regulations in all these areas.
For example, as CriptoNoticias reported, the IMF asked Argentina to take “anti-Bitcoin” measures as a condition to refinance the country’s debt with the agency. It is a possibility that such a requirement will be replicated in the entity’s negotiations with other governments.
Finally, the case of El Salvador, a Central American country that adopted bitcoin as legal currency in 2021, cannot be ignored. This decision has earned it warnings and pressure from the Fund, which seems to see this cryptocurrency as a threat to its international influence.