DeFi system
IMF warns DeFi system could accelerate ongoing trend toward crypto
The IMF issued this call in its latest Global Financial Stability Report, published this week. The document outlines a range of risks to the global financial system. Including “shock waves from the war in Ukraine” and a dangerous combination of inflation, debt and monetary policy.
Cryptocurrencies also have a spot on the wall of concerns. Tobias Adrian, financial adviser at the IMF, said in the summary of the report:
- "The more widespread use of crypto assets in emerging markets could undermine domestic policy goals,”he said.
The report said that crypto ecosystems may allow individuals or entities to circumvent sanctions. Bitcoin mining can help countries evade sanctions. Allowing it to “monetize energy resources”. Russia and Iran probably account for 15% of global mining revenues. That amounted to 1 1.4 billion last year, according to the report.
The Treasury Department this week placed a Russian miner, petriver, on the list of sanctioned entities. “Russia has a comparative advantage in cryptocurrency mining due to energy resources and a cold climate,”the Treasury Department said in a press release.
On a larger scale
More broadly, the IMF sees increasing risks to stability in decentralized finance. RIA platforms consist of “smart contracts” which are essentially code that defines the terms of a transaction. It is fully automated and does not rely on centralized entities for market making, liquidity, settlement or custody services.
Users typically borrow a stablecoin – a token designed to maintain a fixed value-and provide a volatile cryptocurrency such as Ether or Bitcoin as collateral for the loan.
Stablecoins are then used for trading, often as collateral for a long or short bet on another cryptocurrency. Lenders are compensated with a return on the tokens they provide to the “liquidity pool”, setting prices depending on supply and demand in the market.
The regulations aim to build protection for lenders through collateral requirements and automatic liquidation arising from lack of collateral. Or when the loan-to-value ratio is below a predetermined threshold.
Rhea exploded with more than.215 billion of “locked value” on the platforms, up from less than a billion dollars two years ago, according to DeFi Llama.
The International Monetary Fund:
- "DeFi often involves the accumulation of leverage, which is particularly vulnerable to market, liquidity and internet risks.
Developing ways to attract large investors
DeFi is also working its way into the institutional world where platforms are developing ways to attract big investors . Create more linkages and mechanisms with the potential to influence traditional finance.
The IMF may warn that DeFi may “accelerate the ongoing trend towards crypto” in some economies, potentially displacing traditional currencies and undermining the state's monetary policies.
The solution, from the IMF's point of view, is to crack down on DeFi enablers: centralized exchanges, wallet providers, and stablecoin issuers.
While authorities can also review programs that govern smart contracts; require disclosures from DeFi platforms; and establish more governance in the industry . Perhaps through a self-regulatory organization.
Another option would be to restrict exposure to DeFi platforms by regulated entities such as cryptocurrency exchanges, with the aim of “slowing growth”.