DeFi Could be Important But Needs to Be Regulated, Says BIS

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Updated: Dec 7, 2021, 12:50 UTC

The Bank for International Settlement believes that the DeFi space can complement the services offered by traditional financial institutions.

The decentralized finance (DeFi) space is one of the fastest-growing in the cryptocurrency space. The sector is worth more than $250 billion, and it is expected to record further growth over the coming months and years.

DeFi Needs to Be Regulated

A new report from the Bank of International Settlement (BIS) has pointed out that the DeFi space could play an important role in the traditional financial system. However, the BIS, also known as the central bank of central banks, said the DeFi space needs to be regulated.

The report titled “DeFi risks and the decentralisation illusion” said DeFi has the potential to complement traditional financial activities. However, in its present state, the BIS said DeFi has few real-economy uses.

“DeFi would need to satisfy a number of conditions if it is to become a widely used form of financial intermediation. For one, blockchain scalability and large-scale tokenisation of traditional securities would need to be improved. No less importantly, DeFi will need to be properly regulated,” the report added.

The BIS recommended that public authorities will need to interface with DeFi’s inherent governance structures. This will ensure sufficient financial stability safeguards and promote trust by addressing investor protection issues and illegal activities.

BIS’s Endorsement is Huge for DeFi

Traditional financial institutions are yet to embrace the decentralized finance space. However, the report by BIS indicating that DeFi could play a crucial role in the traditional financial system could encourage more institutions to enter the DeFi space.

The DeFi space has experienced massive growth in recent months, with most of the protocols reaching new milestones. The total value locked (TVL) on DeFi protocols on the Terra blockchain hit $11.9 billion, making it one of the leaders in the sector.

The DeFi space provides financial services in a decentralized way, ensuring that anyone in any part of the world can gain easy access to those services.