A German central banker has called for a bank-like international standard setter for financial technology innovation - while dismissing decentralized finance (DeFi) as a "casino" for speculators.
Joachim Wuermeling called for discussions "now" on how to address the fast-growing segment of blockchain-based finance that could make banks obsolete.
The move comes after the international Financial Stability Board (FSB) organization was asked to develop new rules for the crypto sector - and amid a fierce debate over the right way to regulate financial services that are not controlled by a single entity.
"To me, DeFi looks more like a casino for tech-savvy speculators," Wuermeling, a member of Deutsche Bundesbank's executive board responsible for banking supervision and IT, said in a speech Thursday.
DeFi "is growing fast and so are its connections to the rest of the financial world and the economy... we now need to discuss regulatory options," he added, but also said there are "still too many hurdles to overcome" for the technology to fully catch on.
"I could imagine a global forum similar to the Basel Committee on Banking Supervision that could set global ground rules for digital innovation," Wuermeling said, referring to the international organization that sets capital rules for conventional lenders such as Deutsche Bank and JPMorgan Chase.
"Digitalization knows no boundaries," he said. "That's why we need to coordinate across national borders to shape regulation."
The move follows calls from major developed nations for the FSB to speed up regulation, which would mean crypto would be treated like regular finance. An FSB spokesperson told CoinDesk that no timetable has yet been set for this work, although a separate report on stablecoins is due in October.
Opinion is divided, however, on how exactly these rules, meant to regulate specific centralized entities such as banks and funds, would apply in the world of DeFi.
Activities, not entities
A recent study for the EU's Blockchain Observatory called for regulators' approach to shift from regulating specific institutions to activities such as lending or investing. A report released Wednesday by the Bank for International Settlements, which hosts the FSB and the Basel Committee, advocates an approach known as "embedded supervision," in which regulators are given a privileged seat within the DeFi code.
Others, such as Joshua Ellul, director of the Centre for Distributed Ledger Technologies at the University of Malta, suggest a phased approach in which DeFi applications must first appoint real-world trustees to fulfill regulatory obligations such as auditing.
"Over time, if regulators realize it works, they could even say, 'You don't need an accountant anymore'... and they can remove that requirement," Ellul told CoinDesk. "I don't see it as immediate, fully decentralized regulation. I see it as a gradual elimination of certain centralized items."