A report from Morgan Stanley said the growth of decentralized finance (DeFi) may soon slow, due to regulatory issues and oversizing, CoinDesk wrote on Tuesday, March 22.
Central bank easing programs have forced investors to look for yield in new places. This helped push the total assets locked in DeFi to around $200 billion, from around $600 billion in 2020, according to Morgan Stanley.
DeFi projects offered high returns in an effort to attract more users, which increased the value of the platform.
The report notes that there could be a call for the idea of having no middlemen, with proponents touting DeFi as a way to boost the financial system. However, Morgan Stanley said it didn’t see much evidence to support this.
“DeFi protocols rather often appear to us as a way to attract cash flow to enrich protocol operators,” said last week’s report. “DeFi is prone to hacking and financial crime risk given that anonymity is a key feature.”
The report also noted that there is a lack of know-your-customer (KYC) and anti-money laundering (AML) information, which could limit institutional adoption, and uptake. implementing these things could force DeFi to be “more centralized”. Additionally, overcollateralization of lending and borrowing will mean that DeFi lending will not increase its money supply for the same crypto.
With this, and without centralization, DeFi will face greater hurdles to be considered as an alternative to the current system. As such, Morgan Stanley predicted that DeFi could remain small in the coming future.
Morgan Stanley did not respond to an email from PYMNTS requesting the original source report.
PYMNTS wrote that DeFi aims to offer democratic governance without any human management, with all issues decided by the vote of token holders.
See also: Top DeFi Exchange SushiSwap Builds Controls As AML Measures Loom
SushiSwap, the 14th largest decentralized exchange, voted earlier this year on whether to establish a Swiss-incorporated foundation “to mitigate future risks”.
The proposal will provide the DeFi project managed by a decentralized autonomous organization with clarification on the rights and obligations of token holders and contributors. It will also limit liability and create a device to handle administrative matters.