BIS calls DeFi development “Illusion” in its latest quarterly report

On Monday, the Bank for International Settlements (BIS), a financial institution owned by central banks around the world, announced: report examine the development of the decentralized financial industry. The article makes its point of view clear from the start:

“There is an ‘illusion of decentralization’ in DeFi because the need for governance inevitably leads to centralization and structural aspects of the system lead to a centralization of power.

If DeFi is widespread, its vulnerabilities have the potential to undermine financial stability. These weak points are even more serious due to the high level of debt, insufficient liquidity, integrated networking and the lack of shock absorbers such as banks. “

According to BIS, all DeFi protocols have an inherent element of centralization due to a central governance framework, similar to that of a legal entity such as a company. In addition, certain DeFi blockchains concentrate power in the hands of large holders or insiders in token sales.

Cryptocurrency vs. Traditional Finance | Source: BIS

The report also criticized the high leverage of the DeFi lending and trading platforms as Binance’s limit has sometimes exceeded 100x. The BIS also pointed out that the fragility of stablecoins, characterized by uncertainty and lack of regulation, combined with liquidity issues and market risks, can lead to mass withdrawals by investors, causing them to drop well below face value in a short period of time.

Growth of crypto activities | Source: BIS

The report said:

“At the moment, players are primarily focused on crypto speculation, investment and arbitrage rather than real-world use cases. Overall, DeFi’s main premise of eliminating centralized intermediaries does not appear to have been implemented. “

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