The World Economic Forum (WEF) published a white paper with DeFi tools for legislators to examine opportunities and risks.
Regulating decentralized finance (DeFi) is rightly seen as a difficult undertaking. Smart contracts offer many advantages. However, they also attract many black sheep who use the great potential for fraudulent purposes. Still, many DeFi supporters would like to enable the financial inclusion of the roughly 1.7 billion people in the world who do not have a bank account. Therefore, the World Economic Forum (WEF) has published a DeFi framework in cooperation with the Wharton School of the University of Pennsylvania. Its aim is to help policy makers assess DeFi and design potential regulatory measures.
The WEF report identifies some risks to be aware of with DeFi. For example, policy makers need to be aware of “market risk”. This is particularly the case if the asset falls for various reasons, but all of them are part of the laws of the market. There is also always a certain “liquidity risk” – the risk that insufficient funds are available to cover asset withdrawals.
Therefore, the white paper serves as a kind of toolbox. Its aim is to provide an overview of the various aspects of the relatively young DeFi sector within the broader crypto ecosystem. However, the WEF does not intend with the document to recommend specific policy measures for regulators. Instead, the paper says it focuses more on describing what problems DeFi can solve. It also wants to draw attention to certain areas where regulators may need to catch up.
DeFi will raise further questions about whether regulators have the right tools to deal with evolving market activity and how they can assert their jurisdiction over a range of technologies and players that are inherently borderless and global.
it says in the document.
The WEF is the first intergovernmental body to address DeFi. Earlier this year, the Financial Action Task Force (FATF), an international supervisory authority for money laundering, published a proposed regulatory guidance on DeFi. Regulators are paying increasing attention to the area, especially in the wake of the recent bullish development in the crypto market. Jehudi Castro Sierra, Digital Transformation Advisor to the Presidency of Colombia, said that his country will be the first to use the set of tools to develop policies and regulations related to DeFi in Latin America.
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