Jerome Powell Takes a Moderate Stance on DeFi and CBDCs Amidst Regulatory Crackdown

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Jerome Powell Takes a Moderate Stance on DeFi and CBDCs Amidst Regulatory Crackdown

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Federal Reserve Chair Jerome Powell expressed a nuanced approach towards decentralized finance (DeFi) during a forum on the tokenization of finance hosted by the Banque de France. While Powell acknowledged the importance of establishing regulations in the DeFi space, he cautioned against rushing into restrictive measures without proper assessment of their potential impact on the emerging sector. Powell also emphasized that crypto does not pose a systemic risk to traditional finance, suggesting a measured approach to regulation.

Regarding a central bank digital currency (CBDC), Powell stated that the Federal Reserve is not in a rush to launch a CBDC. Instead, the Fed intends to collaborate with the U.S. Congress and the Biden Administration to evaluate policy and technological considerations. Powell outlined four key capabilities that a CBDC program should possess: intermediation, privacy protection, identity verification, and interoperability.

In contrast to Powell's stance, European Central Bank president Christine Lagarde emphasized the need for strict regulation in the crypto space, citing the collapse of Terra as an example of the potential risks. However, Lagarde also acknowledged the need for central bankers to study blockchain technology.

The focus on regulating DeFi is increasing among global regulators. Agustin Carstens, the general manager of the Bank of International Settlements, highlighted the vulnerability of DeFi apps to similar risks found in traditional finance. He emphasized the lack of necessary infrastructure in DeFi to address these challenges.

The forum took place amidst a critical period of regulatory developments in the crypto industry. South Korea is reportedly seeking to question and freeze the assets of Do Kwon, the founder of Terra, while Interpol has issued a Red Notice for his detention. However, Kwon has stated that he is cooperating with authorities. Additionally, Gary Gensler, the chair of the U.S. Securities and Exchange Commission, hinted that certain Proof of Stake cryptocurrencies could be classified as securities and subject to registration. The Commodity Futures Trading Commission also recently sued a DAO for failing to register its offerings, causing concern among DeFi participants. U.S. lawmakers are further considering legislation that could temporarily ban specific algorithmic stablecoins.