Money 20/20: DeFi is ‘really risky’ without regulation, says HSBC exec

There should be a balance between regulation and innovation in decentralised finance (DeFi) , the head of FinTech partnerships at HSBC has said.

During a panel discussion at Money 20/20 in Amsterdam, Rita Martins warned that without regulation DeFi would be “really risky”.

In March, the Bank of England published a report which found that while the direct risks to the UK from cryptoassets and DeFi are “currently limited”, if the pace of growth seen in recent years continues and they become more interconnected with the wider financial system, this would change.

“With DeFi worth $100 billion, it’s clearly not a fad,” said Martins, explaining that it is important for banks and consumers to understand the technology and use cases behind DeFi.

She revealed that HSBC is exploring the technology internally and is currently hiring entrepreneurs outside of banking to help build decentralised solutions.

DeFi risks

Although responsibility to explain the risks should lie with DeFi platforms, Martins is concerned that consumers don’t really understand them.

However, she said that too much regulation could impact on innovation and if banks wait too long it might be too late to start the journey.

Regulation

The HSBC exec also asked whether existing regulatory processes should be used or if there should be a new standard.

Szymon Sypniewicz, chief executive of DeFi protocol firm Ramp, claimed the industry already has the tools to police decentralised finance but that there needs to be more enforcement action from regulators.

“Protect crypto as a place to build and experiment at the same time make sure consumers are informed about all the risks,” he said.

The head of product at Sommelier Finance said that the regulation framework should be standardised, mirroring other financial services like hedge funds, where users have access to “expected risk and returns”.

“The structure should be similar,” he said, adding that DeFi protocols should be responsible for educating on risk.

Tycho Onnasch, co-founder of Zest Protocol, said that the real problem with regulating DeFi is that it relies on liquidity pools – with other people able to take out of the pool or swap tokens against each other.

“How do you regulate that pool?,” he asked, suggesting that it would be better for regulators to publish a blacklist of unapproved companies.

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