The Bank for International Settlements (BIS) recently published a report on non-bank financial intermediaries. In the report, BIS assessed the decentralization of decentralized finance (DeFi) as “an illusion”. In particular, it found that DeFi is not really decentralized, with most DeFi solutions controlled tightly by developers. The report also found that DeFi suffers from investor protection issues, money laundering problems and serious financial vulnerabilities such as liquidity mismatches. In conclusion, the report notes that, although DeFi does promote external financing, innovation and economic growth (particularly in areas in which traditional financial institutions do not operate), DeFi activities can be a source of financial instability. For this reason, DeFi should be regulated on national and global levels as this would provide liquidity support in emergency situations, better reporting and monitoring and a greater ability to withstand shocks.
View the full report here.