International financial institution that supports central banks globally to ensure monetary and financial stability, DeFiHe stated that .
According to the BIS, DeFi tends to have “significant financial vulnerabilities.” The BIS says solvency concerns can affect FIAT-pegged cryptoassets such as stablecoins, which could lead to large simultaneous withdrawals and eventual default.
“DeFi also raises first-degree ‘money laundering’ and ‘investment protection concerns’. In addition to all this, DeFi is prone to significant financial security vulnerabilities. While these are similar to those in more traditional finance, they can be seen on a much broader scale.
For example, stablecoins (the most important asset that makes DeFi work) are subject to classical transactions. Liquid demands are supported by less liquid reserve assets.”
While the BIS is uncertain whether the risks in the crypto ecosystem will spill over into traditional finance, it thinks the possibility should not be ‘underestimated’.
“In the crypto ecosystem, risks have so far been mostly infrequent and massive price drops have emerged. It remains unclear whether such vulnerabilities are confined to this ecosystem or whether they will spread to traditional finance as well.
However, especially stablecoin The potential for spillover should not be underestimated, as the regulations themselves can create important links. As history has attested, anything that grows exponentially is unlikely to be self-sufficient and should therefore be watched carefully.”
BISHe also considers DeFi’s benefits to the “real economy” “difficult to pinpoint”.
“A new payment and transaction system [DeFi]promises to overcome some of the disadvantages of traditional finance, such as high costs and slow speed.
For now, these gains are hard to pin down: DeFi appears to be operating largely within its own ecosystem, with little in the way of providing financial intermediation to the real economy.”
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.