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Powell Strikes Conciliatory Tone on DeFi

ECB President Lagarde Supports Stricter Regulation of DeFi

Powell Strikes Conciliatory Tone on DeFi

Jerome Powell may not be totally down with DeFi but he isn’t taking the hard line other regulators are pursuing in the latest crackdown on crypto. 

That was the upshot from a forum on the tokenization of finance hosted by the Banque de France in Paris on Tuesday. Powell, the chair of the Federal Reserve, presented a nuanced stance on DeFi.

Like most regulators, he favors establishing rules in decentralized finance. Yet he cautioned against hastily passing restrictions without properly assessing the damage they could cause the fledgling sector. Moreover, Powell said there shouldn’t be any rush to regulate because crypto doesn’t pose a systemic risk to traditional finance.

DeFi Movement

“The good news, I suppose, is that — from the financial stability standpoint — the interaction between the DeFi ecosystem and the traditional banking system is not that large at this point,” Powell said via video feed. “We were able to witness the DeFi movement, but it didn’t have a significant impact on the broader financial stability.”

As for a digitalized dollar, Powell stated that the Fed is in no hurry to launch a CBDC (central bank digital currency). Instead the Fed will collaborate with the U.S. Congress and the Biden Administration to evaluate policy and technological issues. 

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The Defiant The Defiant

Powell said a CBDC program should have four capabilities: it should be intermediated, privacy-protected, identity-verified, and interoperable.

“We would be looking to balance privacy protection with identity verification, which has to be done in today’s traditional banking system as well.” Powell said.

Powell’s tone contrasted with that of Christine Lagarde, the president of the European Central Bank, which sets monetary policy for the 27-nation European Union. 

Abused Its Position

Lagarde described how crypto evolved from a fringe idea embraced by libertarians into a form of payment embraced by stalwarts such as  Visa, Mastercard, and PayPal. Yet Lagarde highlighted the $60B collapse of Terra and said the failure demonstrated the need for strict regulation. She said Terra “abused” its position in the crypto sector. 

Yet Lagarde also said central bankers were obliged to study blockchain technology. 

“If we are not in that game, if we are not involved in experimenting, in innovating, in terms of digital central bank money,” she said. “We risk losing the role of anchor that we have played for many, many decades.” 

Liquidity Risk

Regulators focus on the risks of DeFi is intensifying. Agustin Carstens, the general manager of the influential Bank of International Settlements in Switzerland, said DeFi apps are vulnerable to the same peril found in traditional finance, including liquidity risk, counterparty risk, and leverage risk. He also said DeFi doesn’t have the necessary infrastructure to address these challenges.

The forum comes at a febrile moment in crypto regulation. South Korea reportedly is seeking to question Do Kwon, Terra’s founder and a native of the Asian nation, and freeze his assets. South Korean prosecutors have asked officials to cancel his passport. News that Interpol has issued a Red Notice for the entrepreneur’s detention by member nations suggested he is on the run.

Yet on Sept. 17, Do Kwon tweeted he is cooperating with authorities. “I am not ‘on the run’ or anything similar,” he said.

Meanwhile, Gary Gensler, the chair of the U.S. Securities and Exchange Commission, has suggested Proof of Stake cryptocurrencies such as Solana, and now, Ethereum, may be deemed securities and subject to registration requirements

Last week, the Commodity Futures Trading Commission outraged DeFi players when it sued a DAO for failing to register its offerings as derivative securities. Moreover, the U.S. lawmakers are drafting legislation that may ban certain algorithmic stablecoins for a period of two years.

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