Decentralized finance involves a myriad of hidden conflicts and risks as securities regulators’ global governing bodies are beginning to orbit one of the fastest growing corners of the crypto market. I warn you that.
Comparing the current rise of decentralized finance (DeFi) with the dot-com bubble, Martin Moloney, secretary-general of the International Organization of Securities Commissions (Iosco), said the explosive growth was “more close attention by regulatory agencies.” Said to justify.
Iosco will publish a 43-page report on DeFi on Thursday, listing more than 12 “major risks” identified in the market. Moloney said the group will collect feedback from market participants and consider drafting guidelines for regulating DeFi.
“Most DeFi protocols rely on centralization in one or more areas, hiding centralized permissions, and some protocols have decentralized names only,” the Financial Times said. The Iosco Board of Directors wrote in the reviewed report.
“What we see is that there are many conflicts of interest in this area, many of which are not transparent,” Moloney told FT in an interview. “Many of the participants in this space claim to be doing one thing and actually doing something else, or actually doing multiple things at the same time.”
Iosco’s comments are added to the increasing chorus of warnings about DeFi’s growth. Proponents advertise that it provides cheaper and more accessible financial services than traditional institutions. DeFi usually refers to cryptocurrency-based software programs that provide financial services without the use of intermediaries such as banks.
Regulators are addressing a wide range of issues on how to monitor the crypto ecosystem, so they are taking limited steps to curb the DeFi market. Many developers state that they are not responsible for open source software programs once they are released to the user community.
Moloney said the economic and material benefits between the development team and the DeFi project are “often very conflicting.” Development teams often make large allocations while serving to distribute cryptocurrency tokens that help manage the project.
“The key issue is clearly about conflicts of interest, and obviously about the key players who maintain centralized power and control in this sector,” Moloney said. “If we don’t recognize the power and control they have, we’re in trouble.”
The FT reported in June last year that Iosco held an event attended by key regulators and representatives of DeFi projects such as the decentralized exchange Uniswap. The organization has also set up a DeFi Working Group led by the US Securities and Exchange Commission.
According to the analytics website DeFi Llama, cryptocurrency owners have invested more than $ 210 billion in DeFi projects, much of which is used to fund over-collateralized loans and peer-to-peer transactions. Venture capitalists have also poured money into the development team and cryptocurrency tokens issued by the project.
In the report, Iosco also warned DeFi about “slightly unique” market manipulation risks, such as front-running transactions on Ethereum by users who help validate transactions on digital ledgers.
“When sufficient front running occurs on a particular blockchain, transactions can become outdated, consensus can be false, and ultimate confidence in the ability of the blockchain to process transactions and achieve settlement finality can be lost. There is, “the board of directors wrote.
Additional report by Stephania Palma