Is the world ready for the lending risks from the rise of decentralised finance? Gemini says new rules are needed to ringfence DeFi risks

The cryptocurrency exchange said traditional rules are not equipped to protect investors in the fast-growing, US$247 billion decentralised finance industry

Blockchain-based DeFi is difficult to regulate because it is constantly transforming to stay ahead of regulators, says head of Hong Kong’s securities watchdog

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Published: 4:51pm, 12 Dec 2021Updated: 9:53am, 13 Dec 2021

Regulators should reach an agreement on how to define activities in the US$247 billion industry of decentralised finance, or DeFi, as existing rules are ill-suited for safeguarding against risks stemming from such crypto-lending services, says New York-based crypto exchange Gemini.

The comment followed the exchange’s launch of a lending programme in Hong Kong last month, which allows users to store and earn interest on 60 cryptocurrencies and stable coins. Gemini’s platform promises an annualised return of up to 8.05 per cent in exchange for lending these tokens out to various borrowers, who back up the loans with collateral.

As blockchain enables its users to borrow and lend funds with each other without the need for traditional players such as banks or brokers, existing rules governing these parties will not work for DeFi, according to Andy Meehan, chief compliance officer for Asia-Pacific at Gemini. There are currently no specific rules governing DeFi in Hong Kong.

“There needs to be a general global agreement on what DeFi is and what mechanisms make the most sense for regulating the industry,” said Meehan. “But the answer is certainly not to apply existing frameworks designed to regulate the traditional financial industry to DeFi.”

The stance from the start-up valued at more than US$7 billion, and which runs a team of 50 in Singapore, underscores the increasing global popularity of DeFi, as regulators try to grapple with the risks from what some have coined the “shadow financial market”.

Between 2020 and 2021, DeFi users and investors have suffered from over US$12 billion in losses due to theft and fraud, according to crypto analytics provider Elliptic. The amount of money handled by related services, which include managing stable coins and other crypto assets, has grown 18-fold over the past year to US$247 billion.

Mehan’s comment echoes views from others in the industry that overregulation could hurt innovation. Last week, several US crypto exchanges, including CoinBase and FTX, urged Congress to take a light approach in regulating digital assets.