DeFi Vulnerabilities ‘Exceed Those in Traditional Finance’: Bank of International Settlements

The Bank for International Settlements (BIS) has warned that the crypto industry—as well as the broader non-bank financial sector—threatens financial stability and claims “systemic regulation” is needed. 

“In the crypto ecosystem, risks have so far surfaced mainly in frequent and sizeable price crashes. Whether such fragilities are limited to this ecosystem or can spill over to the traditional one is still unclear,” the BIS said. “But the potential for spillovers should not be underestimated.” 

“As history confirms, anything that grows exponentially is unlikely to remain self-contained and thus merits the closest attention,” the BIS added. 

BIS, DeFi, and stablecoins

The BIS has focused the majority of its warning against the burgeoning decentralized finance (DeFi) space. 

While the DeFi system “appears to be operating largely within its own ecosystem,” the BIS has identified a series of concerns. 

“Besides giving rise to first-order money laundering and investor projection concerns DeFi displays substantial financial vulnerabilities,” the group added. 

These, it argues, “parallel but exceed those in traditional finance.” In turn, the BIS has taken aim at stablecoins, which “are subject to classic runs.” 

In a previous joint report with the International Organization of Securities Commissions (IOSCO), the BIS said traditional payments rules must apply to stablecoins. 

“This report marks significant progress in understanding the implications of stablecoin arrangements for the financial system and providing clear and practical guidance on the standards they need to maintain their integrity,” IOSCO chair Ashley Adler said at the time. 

Bitcoin still a worry

DeFi and stablecoins are not the only aspects of the crypto industry that concern the BIS. 

The BIS has also taken aim at Bitcoin, as it did earlier this summer. In a report published in June, the Bank criticized the flagship cryptocurrency for its energy consumption and role in money laundering. 

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“Bitcoin, in particular, has few redeeming public interest attributes when also considering its wasteful energy footprint,” the report said. 

Today, Bitcoin consumes approximately 121 terawatt-hours of electricity per year, which is more than the amount of electricity consumed by most of the world’s countries every year.