A recent report by the Bank for International Settlements (BIS) issues a warning regarding decentralized finance (DeFi), saying that it could cause harm to the existing financial system.
The BIS was established in 1930 and is based in Basel, Switzerland. Its aims are “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”
The BIS report claims that DeFi has several vulnerabilities, and it outlined a scenario where solvency issues could lead to a massive withdrawal and default on systems reliant upon fiat-pegged stablecoins.
The report reads:
For instance, stablecoins – the grease between DeFi wheels – are subject to classic runs: the backing of liquid claims with less liquid reserve assets can touch off downward price spirals akin to those stemming from redemptions in the investment fund industry.
The BIS report also noted that risks in the sphere of DeFi could have ramifications for traditional financial markets and should therefore not be “underestimated.” The organization said the potential for spillovers was likely concentrated in stablecoins and that the industry presented a risk as a result of its rapid growth:
As history confirms, anything that grows exponentially is unlikely to remain self-contained and thus merits the closest attention.
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