US Fed chair Jerome Powell discussed decentralized finance (DeFi) and its regulation during a panel discussion on digital finance organized by Banque of France. He began by stating that there are “major structural flaws” and a “conflict of interest” in the DeFi ecosystem as a result of the “normalization” of monetary policy across the globe.
Additionally, he said that regulators had previously raised concerns about these risks, which are now only becoming reality. He went on to mention the DeFi ecosystem’s lack of transparency.
“All it did was simply reveal what we’ve long pointed out as significant structural issues in the defi ecosystem and conflict of interest…. Within the defi ecosystem, there are these very significant structural issues around transparency — lack of transparency.”
According to Powell, the connection between the defi ecosystem, the traditional banking system, and the traditional finance system is currently not very significant from the perspective of financial stability. Hence, they were able to predict the Defi Winter and its impact on the banking system. He opines that the overall impact on global financial stability was minimal.
Powel says that it’s a “good thing” that the impact was low and that “it demonstrates the weaknesses and work that needs to be done around regulation carefully and thoughtfully, and gives us a little bit of time.”
The Federal Reserve chairman did caution that the situation he had just described will not last forever. He emphasized that they must be extremely cautious because in the end, that equilibrium is not stable.
The conversation also included participation from the president of the European Central Bank (ECB), Christine Lagarde, and the general manager of the Bank for International Settlements (BIS), Agustin Carstens. Both agreed with Powell and emphasized how crucial it is to properly regulate the defi industry.