US Regulators and Treasury Study Sound Alarm on DeFi and Digital Currencies’ Impact on Banking Stability

1. Crypto executives briefed US regulators on DeFi during CFTC meeting.
2. DeFi’s decentralization, digital identities, and vulnerabilities were discussed.
3. US Treasury study suggests stablecoins or CBDCs may threaten banking stability.

U.S. commodities regulators received a comprehensive briefing on decentralized finance (DeFi) during the inaugural meeting of the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee (TAC) in Washington D.C. 

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Crypto executives provided insights on critical aspects of DeFi, such as decentralization, digital identities, and potential vulnerabilities. CFTC Commissioner Christy Goldsmith Romero highlighted the significance of grasping DeFi concepts as lawmakers and regulators are currently shaping policies surrounding the emerging field.

Ari Redbord, Head of Legal and Governmental Affairs at TRM Labs, delved into the basics of DeFi and blockchain technology, emphasizing their transparency, immutability, and privacy attributes. Redbord posited that these features could enable regulators to find equilibrium between individual privacy rights and the necessity for security. 

Redbord and Nikos Andrikogiannopoulos, the founder of Metrika, together assessed the merits and challenges of decentralization, concluding that the advantages far surpass the difficulties, which they believe will resolve themselves in due course.

In other news, research conducted by a division of the U.S. Treasury disclosed that incorporating a stablecoin or central bank digital currency (CBDC) into the financial system might bolster household well-being while concurrently posing a threat to the stability of banks. 

The study highlighted that the adverse consequences for the banking industry could be especially noticeable during periods of economic strain. This investigation deviated from earlier research by focusing on a hypothetical equilibrium in the financial landscape after the successful introduction of a digital currency, instead of assessing the risks tied to bank runs and disintermediation.

The authors of the study cautioned against the risk of systemic deleveraging, which refers to a reduction in banks’ equity that could decrease stability during crises after the introduction of a digital currency. They maintained that bank deposits would vie with the digital currency in households’ liquidity portfolios, compelling banks to narrow the gap between lending and deposit rates by raising the interest paid on deposits. As a result, banks would possess less equity than if digital currencies were not present in the market.

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