A recent report from the Bank for International Settlements (BIS) has sparked backlash from crypto industry figures after recommending a stronger regulatory approach focused on containing the risks of crypto as its connections to the traditional finance industry deepen.
The report, titled "Cryptocurrencies and decentralised finance: functions and financial stability implications," presents an overview of the current state of DeFi, noting its deepening ties to the financial industry through developments like crypto ETFs and real world asset tokenization.
"In terms of prudential regulation, the objective is to make sure that the risks that may be generated by crypto and DeFi do not spill over to crucial parts of TradFi and the real economy, and hence a 'contain' approach is warranted," the paper's authors write. The paper notes that an outright crypto ban would not be "either desirable or feasible."
The report identifies several risks resulting from "externalities" — costs (or benefits) of a certain market behavior to an unrelated third party. The paper's authors argue that despite crypto's transparent structure, information asymmetry may persist. "Given the novelty of crypto and DeFi, it is complex for consumers to differentiate across products on the basis of their quality in the DeFi space...Indeed, outright scams can persist (and have persisted) for long periods in crypto and DeFi," they write.
Though the report acknowledges crypto is more transparent than the traditional financial industry in some ways, "...the anonymous nature of the blockchain reduces reputational risk, as participants’ actions are not linked to real world identities, increasing the incentive to take larger risks," the authors argue.
As DeFi continues to integrate more with the traditional financial system, performing similar tasks, the industry should be subject to similar regulations, the authors argue. "This may include enacting appropriate disclosures, imposing know-your-customer requirements on operators and enforcing minimum standards of professional qualification," the report states.
'Completely uninformed and frankly, dangerous'
The report's publication spurred harsh criticism from certain crypto industry figures, including Christopher Perkins, president of crypto VC firm CoinFund, who called the report's recommendations "completely uninformed and frankly, dangerous."
In a post on X, Perkins excoriated the report's conclusions. "Many of their recommendations and conclusions—perhaps due to a mix of fear, arrogance or ignorance—are completely uninformed and frankly, dangerous," Perkins wrote. "If implemented they will cause—not mitigate—the systemic risk they seek to prevent."
Perkins also pushed back on the paper's assertion that DeFi's structure leads to information asymmetry for users. "Open source, transparent code—that performs as it is coded—is a significant improvement over the opacity and asymmetries of the current system," Perkins said.
Curve founder Michael Egorov's response was more simple: "Boycott this sh-t," Egorov wrote in response to the paper's regulation recommendations.
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