DeFi protocol risks: The paradox of cryptofinance

Nic Carter and Linda Jeng

Contents

Foreword

Preface

Preface

Introduction: Suptech/regtech defined: Payments, sandboxes and beyond

1.

The uncertain prudential treatment of cryptoassets

2.

US regulatory certainty versus uncertainty for crypto and blockchain

3.

Bermuda: Suptech and regtech supporting the risk-based approach

4.

Suptech: A new era of supervisory philosophy

5.

Cloud computing in the financial sector: A global perspective

6.

DeFi protocol risks: The paradox of cryptofinance

7.

IT transformation in the Prudential Authority of South Africa: A case study

8.

Making the vision a reality: Perspectives from the Monetary Authority of Singapore

9.

Lessons from Hong Kong through the lens of the HKMA

10.

Technological change: Is it different this time?

11.

The ECB’s suptech innovation house: Paving the way for digital transformation of banking supervision

12.

China’s financing opening up and regulatory convergence with the world

13.

Disclosures and market discipline: The promise of regtech

14.

Regtech and new derivatives developments

15.

Fintech and regtech: Leading the evolution and regulation of alternative investments

16.

The role of artificial intelligence and big data in investment management

17.

The promise and challenges of machine learning in finance

18.

Data privacy and alternative data

19.

Digital ID and financial inclusion

20.

Strategic technology: Regulation and innovation of CBDCs

21.

Regulatory sandboxes: Innovation and financial inclusion

22.

Technology and sandbox development innovation in a transitional market: A case study

23.

Developing the regulatory ecosystem: The evolution of stablecoin

24.

Central bank digital currency, regtech and suptech

25.

Digital dollar: Cryptocurrency for everyday commerce

26.

CFTC regtech implications for virtual currency trading

27.

Fintech, regtech, suptech and central bank decision making

On February 16, 2021, the price of Bitcoin crossed US$50,000 for the first time, doubling its value in less than two months (Vigna and Ostroff, 2021). Earlier in the year, a string of announcements by some Wall Street banks and traditional financial firms, including Bank of New York Mellon, Mastercard and Blackrock, proclaimed that they would begin working with Bitcoin. The companies Square and Tesla also made a splash by investing a combined total of nearly US$2 billion in bitcoin (Son, 2021). Meanwhile, Square and PayPal’s retail customers now buy an amount equivalent to a majority of the new supply of Bitcoin entering the market each day (Rooney, 2020). Visa also unveiled a Bitcoin and crypto plan to be launched later in 2021 (Bambrough, 2021). Crypto is becoming mainstream and is here to stay.

Decentralised finance (DeFi) is typically understood by crypto users and enthusiasts as platforms and protocols that seek to replicate existing financial services by using crypto/blockchain technology with limited centralisation. CoinDesk defines DeFi as: “an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial

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