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Federal Reserve Chairman Jerome Powell says decentralized finance (defi) has “very significant structural issues,” emphasizing a “real need” for more appropriate regulation of the defi ecosystem.

Fed Chair Jerome Powell on Defi Regulation

Federal Reserve Chairman Jerome Powell talked about the regulation of decentralized finance (defi) Tuesday during a panel discussion on digital finance hosted by Banque of France.

“The monetary policy normalization that we’re seeing all over the world,” Powell began. “All it did was simply reveal what we’ve long pointed out as significant structural issues in the defi ecosystem and conflict of interest.” He stressed:

Within the defi ecosystem, there are these very significant structural issues around transparency — lack of transparency.

“The good news, I suppose, is that … from the financial stability standpoint, the interaction between the defi ecosystem and the traditional banking system and the traditional finance system is not that large at this point. So we were able to witness the defi winter. It didn’t have significant effects on the banking system and broader financial stability,” Powell detailed.

“That’s a good thing,” he exclaimed. “I think it demonstrates the weaknesses and work that needs to be done around regulation carefully and thoughtfully, and gives us a little bit of time.”

However, the Federal Reserve chairman warned that the situation he just described “will not persist indefinitely.” He clarified that “Ultimately that’s not a stable equilibrium and we need to be very careful about … how crypto activities are taken within the regulatory perimeter,” elaborating:

In any case … there is a real need for more appropriate regulation so that, as defi expands and starts to touch more and more retail customers, appropriate regulation is in place.

Christine Lagarde, the president of the European Central Bank (ECB), and Agustín Carstens, the general manager of the Bank for International Settlements (BIS) also participated in the discussion. Both concurred with Powell and similarly stressed the importance of appropriately regulating the defi ecosystem.

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