G20 Financial Stability Board presents policies to deal with risks posed by DeFi

Report on DeFi risks

The Financial Stability Board (FSB), the global financial supervisory body for the Group of 20 (G20) countries, today released a report on the risks decentralized finance (DeFi) poses to the stability of the financial system. It also shows the policy when considering DeFi vulnerabilities.

First, the FSB pointed out that although DeFi’s service delivery method is new, it does not differ significantly from traditional finance in terms of functionality, and may inherit and amplify the risks of traditional finance.

These include operational vulnerabilities, liquidity and maturity mismatches, leverage, and the risk of cascading effects from interconnected financial institutions.

Specifically, governance can be opaque, reliance on unreliable blockchains can be unreliable, users can be exposed to theft with things like cross-chain bridges, smart contract coding errors. etc. were listed.

connection: Hacked by inter-chain bridge “Nomad”, loss equivalent to 20 billion yen such as WBTC

connection: Credit Suisse has over 900 billion yen in illicit funds for many years

DeFi liquidity risk

The report notes that liquidity risk in DeFi will be greater, especially for stablecoins and lending protocols. In DeFi, borrowed funds are often used as collateral for other loans, sometimes leading to “collateral chains” (similar to re-collateralization), making it difficult to measure leverage and liquidating collateral. may not be uniformly adjusted.

Furthermore, DeFi tokens could potentially replace fiat currencies, especially in countries with fragile macroeconomic conditions. Although the FSB did not mention the specific issue, it is believed that this refers to, for example, a USD-denominated stablecoin.

The FSB argued that DeFi’s current impact on the wider financial system is limited given the small impact of the FTX failure on the traditional financial system, arguing that:

In light of this situation, the FSB has made proposals such as creating a DeFi vulnerability index.

DeFi Risk Response Policy

The FSB has presented the following three main policies for dealing with DeFi vulnerabilities.

• Proactively analyze the financial vulnerabilities of the DeFi ecosystem
• Enhancing data to monitor the interconnectedness of DeFi, cryptocurrencies and the traditional financial system
• Consider the extent to which policy recommendations regarding international regulation of cryptocurrency activities need to be strengthened.

In terms of vulnerability analysis, it will also investigate the tokenization of real assets, as it may increase the linkage between virtual currencies and the real economy.

In terms of strengthening monitoring data, he said that he would cooperate with regulatory authorities to expand the sharing of existing data and consider using additional information gathering methods.

In addition, regarding the content of the policy recommendations, as an example, it refers to regulatory requirements for traditional financial institutions’ direct exposure to DeFi (exposure to price fluctuations of assets with portfolios). He also said that regulations on cases where financial institutions are indirectly involved with DeFi (such as custody provision and transactions with DeFi-related companies) can be considered.

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