Federal research papers warn of potential crypto CeFi and DeFi threats

The research arm of the US Federal Reserve published two papers examining decentralized finance and the implications of digital assets for financial stability last week.

The Fed and its leadership have advocated for greater oversight of the cryptocurrency industry, especially in light of its connections to the broader financial system. The authors of the paper on financial stability suggested more stringent oversight for firms handling client funds.

The report states that oversight, detailed disclosures, and capital and liquidity requirements might enhance the resilience of businesses within the digital asset ecosystem. 

The stability report stated that the crypto ecosystem is “prone to the accumulation of financial vulnerabilities,” but noted that “financial stability risks are not broad since the digital asset ecosystem does not provide major financial services and its linkages with the conventional financial system are restricted.”

However, such dangers may increase in the future, the scientists observed. The study titled “Decentralized Finance (DeFi): Transformative Potential and Associated Risks” offers a comprehensive analysis of the DeFi ecosystem. It notes the enormous expansion of the crypto industry while stressing its possible long-term stability issues.

Since bitcoin’s inception, “the supply of financial services on public, permissionless blockchains” has gone a long way, but the authors note that “DeFi has not yet reached the point of being systemically relevant.” “However, the rapidly expanding function of such blockchains implies that authorities should begin seriously considering a complete spectrum of financial stability risks that may develop should such activities become systemically significant,”

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