The World Economic Forum (WEF) has released a policy toolkit which seeks to provide useful guidance for regulators and government policy-makers concerning Decentralised Finance (DeFi) regulations.
DeFi is an umbrella term for a variety of applications and projects in the public block chain space geared toward disrupting the traditional finance world. Inspired by block chain technology, DeFi is referred to as financial applications built on block chain technologies.
It consists of applications and peer-to-peer protocols developed on decentralised block chain networks that require no access rights for easy lending, borrowing, or trading of financial tools. Most DeFi applications today are built using the Ethereum network but many alternative public networks are emerging that deliver superior speed, scalability, security and lower costs.
According to a new WEF white paper, DeFi is promising but poses novel risks to the financial sector and its own users.
“DeFi will raise further questions about whether regulators have the proper tools to address evolving market activity, and how they can assert jurisdiction over a set of technologies and stakeholders that is intrinsically borderless and global,” the document said.
WEF stated that its toolkit seeks to enable regulators and policy-makers to develop thoughtful approaches to DeFi, while helping industry participants understand and appreciate public-sector concerns.
It is the result of an international collaboration among academics, legal practitioners, DeFi entrepreneurs, technologists and regulatory experts. It provides a solid foundation for understanding the major factors that should drive policy-making decisions.
Decentralized finance is a fast-growing sector with virtually limitless possibilities. However, it is always worth remembering that DeFi is only at an early stage of development. Therefore, the high profitability of new DeFi projects is often associated with high risks.
In a statement, deputy head of the WEF’s Centre for the Fourth Industrial Revolution Sheila Warren, said the toolkit captures issues to do with how provisions of the proposed regulations would put crypto start-ups at a disadvantage compared with legacy finance incumbents.
“This is something we spend a lot of time thinking about, both with respect to supporting fledgling companies driving innovation but also with respect to what it means in terms of access,” she said.
Warren told Cointelegraphs that:
“Part of the promise of DeFi is a more democratized path to engaging with financial services, whether lending, insurance, or other. The cost of compliance can in some cases mean that certain participants are discouraged from entering the market, which both stifles innovation and replicates the existing power differential in the current system.”
The white paper detailed five categories of risk for DeFi: financial, technical, operational, legal and emergent. They include the potential for DeFi hacks, market issues and flash crashes, among other concerns.
Recently, DeFi projects have celebrated a skyrocketing price, credibility, and accessibility. Despite being a relatively new invention, DeFi tokens have price values present between $400 to $600 million with a remarkable reputation of operating worldwide.
DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade crypto currencies, insure against risks, and earn interest in savings-like accounts. DeFi uses a layered architecture and highly compassable building blocks.
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