US Fed Chair Powell Advocates Caution In Regulating DeFi

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Key Takeaways:

  • Jerome Powell, the head of the Federal Reserve, has commented on stablecoin regulation.
  • Leading central bankers have once again focused their attention on the regulation of the decentralized finance (DeFi) industry.

Jerome Powell, the head of the U.S. Federal Reserve, urged legislators to exercise caution when regulating decentralized finance (DeFi) on September 27 during a roundtable meeting hosted by the French central bank.

Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, Managing Director of the Monetary Authority of Singapore Ravi Menon, and General Manager of the Bank of International Settlements Agustin Carstens discussed the function of central banks in the burgeoning crypto economy on stage at the Opportunities and Challenges of the Tokenization of Finance conference in Paris on Tuesday.

In light of the current debacles revealed by the subsequent crypto wreck, such as the implosion of the terraUSD (UST) algorithmic stablecoin, which used a variety of strategies to help the coin maintain its peg, Powell’s snide comments look likely to encourage some due care on those decision makers eager to sprint into placing restrictions.

The general manager of the Bank for International Settlements (BIS), Carstens, claims that one of the main issues with DeFi is that, in its present state, it primarily focuses on “self-referencing” transactions that are unrelated to actual transactions.

DeFi has “structural difficulties” and “intrinsic limitations,” according to Carstens of BIS, but that doesn’t imply “the technology that is behind DeFi is not useful” Regulators must therefore devise strategies “to make appropriate use of them.”

Invoking the general public’s propensity to regard stablecoins as dollar equivalents, Powell emphasized the necessity for strong regulation of stablecoins to ensure they are appropriately backed.

 He said that “[Stablecoin] reserves need to be open to the public and they need to be made up of the kind of credit assets that will always be available to support withdrawals.”

Powell provided additional information on central bank digital currencies, stating that a U.S. digital dollar would need to be transferable, intermediated, and privacy-protected.

The global normalization of monetary policy, according to Powell, has only served to highlight serious structural challenges and conflicts of interest in the DeFi system. 

Powell claims that the true issue is that there are more serious structural problems, such as a lack of transparency, within the DeFi network.

The Fed Chair believes that although we could see the DeFi trend, it didn’t significantly affect overall financial stability.

“I believe the good news is that—from the perspective of financial stability—the relationship between the DeFi ecosystem and the conventional banking system is not that great right now.”

Powell argued that DeFi should be governed by the same regulations that apply to traditional finance, citing the maxim “same risks, same regulation,” as well as cutting-edge features like automated code replacing intermediaries, decentralized democratic accountability, and the incorporation of unhosted cryptocurrency wallets to enable money laundering.

The stability of the financial systems would be affected by the growth of the cryptocurrency markets, according to Powell, who asserts that “more proper rules are really needed.”

However, unless the appropriate legislation is put in place to uphold them, such promises are mostly meaningless to many members of the U.S. government. Powell’s remarks reveal a growing willingness to control and regulate private stablecoins.

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Aadrika Sharma
Aadrika Sharma

I enjoy writing and try to learn new things every passing day!

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