DeFi 'Casino' May Need New Global Regulator, German Central Banker Says
Joachim Wuermeling called for immediate discussions on how to treat DeFi as the Financial Stability Board prepares a rule book for the crypto sector.
A German central banker has called for a bank-style international standard-setter for financial-technology innovations while dismissing decentralized finance (DeFi) as a “casino” for speculators.
Joachim Wuermeling called for discussions “now” on how to treat the fast growing segment of blockchain-based finance that could make banks redundant.
The move comes after international organization the Financial Stability Board (FSB) was asked to develop new rules for the crypto sector – and amid a fierce debate over the right way to regulate financial services that aren’t controlled by a single entity.
“To me, DeFi seems more like a casino for tech-savvy speculators,” Wuermeling, a member of the Deutsche Bundesbank's executive board responsible for bank supervision and IT, said in a speech on Thursday.
DeFi “is growing quickly, and so might its ties to the rest of finance and the economy … we need to be discussing regulatory options now,” he added, though said there are “still too many hurdles to be cleared” for the technology to become fully mainstream.
"I could imagine having a global forum akin to the Basel Committee on Banking Supervision ... that could set global ground rules for digital innovation," Wuermeling said, referring to the international organization that sets capital rules for conventional lenders, such as Deutsche Bank and JPMorgan Chase.
“Digitalization knows no borders,” he said. “That is why we have to coordinate across national borders when we design regulation.”
The move follows calls by major developed nations to the FSB to speed up regulations that would mean crypto is treated like regular finance. A spokesperson for the FSB told CoinDesk that no timeline has yet been set for that work, though a separate report on stablecoins is due in October.
But opinions are divided on exactly how those rules, designed to regulate specific centralized entities such as banks and funds, would apply in the world of DeFi.
Activities, not entities
A recent study produced for the EU’s Blockchain Observatory called for regulators’ approach to shift from regulating specific institutions to activities, such as lending or investment. Meanwhile, a Wednesday report from the Bank for International Settlements (BIS), which hosts the FSB and Basel Committee, favors an approach known as embedded supervision, under which regulators are given a privileged perch within DeFi code.
Others, such as Joshua Ellul, director of the Centre for Distributed Ledger Technologies at the University of Malta, have suggested a step-by-step approach, where, in the first instance, DeFi applications must appoint real-life fiduciaries to discharge regulatory obligations, such as audit.
“Over time, regulators, once they realize this is working, could even say … ‘You no longer need an accountant'... and they can remove that requirement,” Ellul told CoinDesk. “I don't see it as an immediate, complete decentralized regulation. I see this gradually removing certain centralized points.”
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.