DeFi Has 'Significant' Structural Issues, Powell Says, Calling For More Regulation

Stepping up his criticism of decentralized finance (DeFi), Federal Reserve Chair Jerome Powell said on Tuesday the global normalization of monetary policy had "revealed significant structural issues in the DeFi ecosystem" and exposed "conflict of interest" while he called for more effective regulation.

The Fed chairman spoke at a seminar organized by the Banque of France.

“Within the DeFi ecosystem, there are these very significant transparencies, lack of transparency [issues],” he said.

DeFi and Traditional Banking Systems Unrelated

According to Powell, the relationship between the DeFi ecosystem and traditional banking and financial system was not substantial at this time from the perspective of financial stability.

“So we were able to witness the DeFi winter that did not have significant impacts on the banking system and broader financial stability,” he said.

“That’s a good thing. I think it demonstrates the weaknesses and the work that needs to be done around regulation carefully and thoughtfully. It gives us a little bit of time, but that situation will not persist indefinitely,” the chairman said.

“Ultimately that’s not a stable equilibrium and we need to be very careful about how crypto activities are taken within the regulatory parameters. In any case, wherever they take place, there is a real need for more appropriate regulation so that as DeFi expands and starts to touch more retail customers, more appropriate regulation is in place,” he added.

In the past, Powell had voiced concerns about the dangers posed by emerging digital financial products.

“There are potential financial-stability concerns for some products. We don’t know how some digital products will behave in times of market stress,” Powell said.

Congressional Approval Is Needed for Central Bank Digital Money

Providing an update on the development of central bank digital money (CBDC) in the U.S., Powell said that if the Fed decides to form a CBDC, it will need congressional approval in order to go forward.

The Fed does not anticipate making a decision on a CBDC "for some time," according to Powell.

He said that it will take at least a few years to study the issue.

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