DeFi is a monetary enemy #1, according to FRS

Blockchain has been one of the biggest technological developments of recent years, but like any other new technology, it does not come without risks. the Federal Reserve conducted research on the risks that cryptocurrencies may pose in the future.

In the study ‘Decentralized Finance (DeFi): Transformative Potential & Associated Risks’, the US central bank explains how Decentralized Finance (DeFi) but also ‘CeFi’ can still pose a major risk in the future. Companies trading in crypto-assets but not traditional financial institutions fall under the category of Centralized Finance (CeFi). In recent months, quite a few of these types of companies have gone bankrupt because counterparties with whom these parties traded went bankrupt.

Despite being very conservative, the Institute proves to have excellent knowledge of how the market works. The Fed describes in detail the processes on which blockchain and crypto trading platforms are based.

It further lists the different types of risks; the risk of third parties with financial problems, attacks on blockchains, a lack of liquidity, risks caused by regulators and “oracle risks”. The latter means that external data providers are not accurate enough and therefore misinform the market. In fact, the Institute warns of more risks if the market is not properly regulated.

A second study, “the Financial Stability Implications of Digital Assets,” delves deeper into specific aspects of the crypto industry and even specific assets. For example, it describes the market value of certain coins, such as stablecoins, and sets this against the risk.

While Terra’s UST and MakerDAO’s DAI place it in the decentralized camp, it also finds these tokens riskier. Tethers USDT is slightly less risky. USDC is the most secure thanks to good quality and enough collateral. Also, it mentions that some banks hold the deposits of stablecoin issuers that the issuers hold as collateral. In addition, banks may have invested up to 1.5% of their balance sheet in crypto companies.

The author: Margareta STROOT

Margareta Stroot, a multi-talented individual, calls Brussels her home. With a unique blend of careers, she balances her time as a part-time journalist and a part-time real estate agent. Margareta's deep-rooted knowledge of the city of Brussels, where she resides, has proven invaluable in both of her roles. Her journalism captures the essence of the city, while her real estate expertise helps others find their perfect homes in the vibrant Belgian capital.

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