Fed’s Powell calls for DeFi regulation following ‘significant structural issues’

Federal Reserve Chairman Jerome Powell ramped up his criticism of decentralized finance on Tuesday, saying the monetary policy normalization worldwide has “revealed significant structural issues” in the DeFi ecosystem and exposed “conflict of interest,” as he called for more appropriate regulation.

“Within the DeFi ecosystem, there are these very significant transparency, lack of transparency [issues],” he said at a conference hosted by the Banque of France.

From the financial stability standpoint, Powell said, “the interaction between the DeFi ecosystem and traditional banking system and traditional financial system is not that large at this point. So we were able to witness the DeFi winter that did not have significant impacts on the banking system and broader financial stability.

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

“Ultimately that’s not a stable equilibrium and we need to be very careful about how crypto activities are taken within regulatory parameter. 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.”

Powell has also previously expressed concerns about the risks of new digital financial products. “There are potential financial-stability concerns for some products,” he said. “We don’t know how some digital products will behave in times of market stress.”

He also offered an update on the U.S.’s progress with central bank digital currency. Powell said the Fed doesn’t expect to make a decision on a CBDC “for some time,” and will require backing from Congress to proceed with one if it decided to create a CBDC. Studying the issue, he cautioned, will take at least a couple of years.

The European Central Bank, meanwhile, is somewhat in the same boat. It will decide whether it creates a central bank digital currency in about a year. ECB President Christine Lagarde said the central bank must be careful that a digital euro won’t crowd out commercial bank deposits. Commercial banks and other private parties should be involved, but “the pricing must be right,” she said.