US Fed Chair Powell Urges Caution on Regulating DeFi

Regulation of decentralized finance (DeFi) needs to be done “carefully and thoughtfully” given its limited impact on the real economy, U.S. Federal Reserve Chair Jerome Powell said at an event hosted by the French central bank on Tuesday.

His remarks appear to urge some caution on those policymakers keen to rush into imposing rules in the wake of recent scandals exposed by the recent crypto crash, such as the collapse of the terraUSD (UST) algorithmic stablecoin, which used various mechanisms to help the coin maintain its peg.

“The DeFi winter … didn’t have significant effects on the banking system and broader financial stability” due to the lack of links between them, Powell told a panel.

“I think it demonstrates the weaknesses and the work that needs to be done around regulation, carefully and thoughtfully, and gives us a little bit of time,” he said. He added that it is central bankers who, as inflation risks began to materialize, may have inadvertently triggered the collapse of many DeFi initiatives.

“The monetary policy normalization that we’re seeing all over the world, all it did was reveal … significant structural issues in the DeFi system, and conflicts of interest,” Powell said. “All of those things have been revealed now that the tide has gone out.”

Powell said he favored applying the rules of conventional finance to DeFi, citing the mantra “same risks, same regulation” – but also to novel features such as replacing intermediaries with automated code, decentralized governance, and the use of unhosted crypto wallets to facilitate money laundering.

Powell also suggested he was in no rush to introduce a central bank digital currency, a digital form of public money which is under consideration in numerous jurisdictions across the world.

“We have not decided to proceed and we don't see ourselves as making that decision for some time,” Powell said, with the move requiring approval from both Congress and the executive branch. “We're evaluating both the policy issues and the technology issues and we're doing that with a very broad scope.”

His remarks follow a speech given by the European Commission’s Mairead McGuinness, who called for international coordination on applying new rules to both cryptocurrencies and DeFi.

“Decentralized finance ... challenges some of the fundamental aspects of the financial system as it currently exists,” said McGuinness, responsible for financial services at the EU’s executive arm. “The [European] Commission is monitoring the developments and risks in this fast-moving area very closely.”

Other central bankers were more frank about their skepticism.

“I don't see any redeeming value” in cryptocurrencies, said the Singapore Monetary Authority’s Ravi Menon. “Their time for reckoning has come.”

The European Central Bank’s Christine Lagarde said the collapse of terraUSD stablecoin – whose founder, Do Kwon, now appears to be the subject of an Interpol Red notice – showed the need to heap new rules on the sector.

Since emerging from the libertarian dream pushed by Bitcoin founder Satoshi Nakamoto, crypto has “been abused,” Lagarde said. “Mr. Do Kwon, who is on the run, is the other side of that enigmatic coin, which warrants the regulation that has been advocated by both Jay and Ravi.”

Kwon has denied he is on the run in a tweet sent last week, saying he was cooperating with the authorities.