DeFi Projects Rife With Hidden Risks, Global Regulatory Body Warns

The global umbrella organisation for securities regulators has warned that decentralised finance contains myriad hidden conflicts and risks, as authorities begin circling one of the fastest growing corners of cryptocurrency markets. From a report: Comparing the current rise of decentralised finance, or DeFi, to the dotcom bubble, Martin Moloney, secretary-general of the International Organization of Securities Commissions (Iosco), said its explosive growth warranted "closer attention by regulators." Iosco on Thursday plans to publish a 43-page report on DeFi listing more than a dozen "key risks" it has identified in the market. Moloney said the group would gather feedback from market participants and consider drafting guidelines for regulating DeFi.

"Most DeFi protocols rely on centralisation in one or more areas, and there are protocols that have a hidden centralised authority and are decentralised in name only," the board of Iosco wrote in the report, which was reviewed by the Financial Times. "What we're seeing is a lot of conflicts of interest are emerging in this space, and a lot of them are not transparent,â Moloney told the FT in an interview. "A lot of the participants in this space are claiming to be doing one thing and actually doing another thing, or actually doing multiple things at the same time."

There's a name for that

[phantomfive]

"A lot of the participants in this space are claiming to be doing one thing and actually doing another thing

Also known as "fraud"

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[AleRunner]

Also known as "fraud"

It's only fraud if you understand what you are doing *:-P

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[Whateverthisis]

Not true. Charles Ponzi, the "inventor" of the Ponzi scheme, actually thought he had come up with a revolutionary new investment strategy (it originally started via arbitrage for postage stamps) until he failed to figure out how to turn the stamps back into money and he realized the mess he was in. Nevertheless, he went to prison for mail fraud.

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[phantomfive]

Reminds me of someone who went to Cabo and thought that one of the gambling games had a perfect strategy. I knew him, he went to his room and wrote a computer program to figure out the strategy that guaranteed a win (based on odds). So then he went down and put a lot of money on the table, over time winning $400.

During a break he went back to his room, looked at the code and realized there was a bug, and he shouldn't have been winning he just got lucky.

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[nocoiner]

Not true. Charles Ponzi, the "inventor" of the Ponzi scheme, actually thought he had come up with a revolutionary new investment strategy

Just means he was ignorant about finance, invented some financial instrument (like "derivatives" were invented) without understanding how it really worked in the grand scheme of things (only understood what he got out of it), and people that knew better (regulators) figured out what he was doing was actually illegal.

Much of "Defi" is no different.

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[Whateverthisis]

I was simply responding to the point from the GP that it can't be fraud if you don't know what you're doing, assuming therefore you have no intent to be a bad actor.

In Charles Ponzi's case, that wasn't true at all. He had no idea what he was doing and was still convicted of fraud. Thus the DeFi folks, who have no idea what they are doing, are likely committing fraud of some sort.

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[nightflameauto]

I like the Drunk History version of this story much better.

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[AleRunner]

Not an expert on Ponzi, but reading the Wikipedia page [wikipedia.org] makes me think he did plenty of stuff to justify the main fraud part after he at least understood that he wasn't able to do the business he claimed to be doing.

Though Ponzi was still paying back investors, mostly from money from subsequent investors, he had not yet figured out a way to actually change the IRCs to cash. He also subsequently realized that changing the coupons to money was a logistical impossibility.

looking forward to another counter examp

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[Whateverthisis]

No you're hitting it right, and it's not as simple as I laid it out.

Ponzi thought he had found an opportunity in basically arbitraging postage stamps. There was a program in place to exchange stamps from one country for US stamps, and due to currency devaluation you could buy one stamp in Italy for $.01 whereas the price of a stamp in the US was $.05. So he'd buy up as many stamps in Italy as he could and ship them to the US to sell them. He raised money from investors, and promised them a 50% return

Risk

[PPH]

Like regulatory risk [investopedia.com]?

You can't have decentralized finance

[rsilvergun]

Because that's not how markets work. Markets have winners and losers. The winners take their winnings and use them to compound and make more winnings. Eventually they buy out some of the losers who are barely hanging on and you get market consolidation.

Smart contract software has been repeatedly shown to be full of holes. But even if the software was technically sound it wouldn't solve for the people problem. At some point you're going to have to leave the world of software and enter the real world of exchanging goods and services. Valve saw a 50% fraud rate with crypto. The mining pools have become heavily dependent on the exchanges in order to move their currency mined without being defrauded.

We all think about the simple types of fraud were leet hackers use visual basic on an Xbox to reprogram the internet but there's much more simple and straightforward methods like currency manipulation and short selling that are far more effective ways to defraud somebody. Those kind of methods are perfectly compatible with smart contracts and just as likely to destroy a market left unregulated.

In short, there is a reason why we formed governments and had them regulated our capitalist economy. Capitalism is a complex machine and like any complex machine it needs lots of maintenance. Regulation is that maintenance and if you try to decentralize and therefore skip all that maintenance it's going to collapse. You end up with a kleptocracy

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[jwdb]

I'd like to know the details of this "50% fraud" number. It's not like bitcoin (the currency Valve accepted) transactions are reversible, so it must be something along the lines of 50% was money laundering, or maybe stolen funds. He implies as much in his quote "a lot of the actors who are in that space are not people you want interacting with your customers".

The mining pools have become heavily dependent on the exchanges in order to move their currency mined without being defrauded.

Citation needed. The ex

Where do you think the mining pools

[rsilvergun]

Sell their currency to? Yeah they could sell it to some random Joe blow but that random Joe blow can and will steal from them. There's all sorts of stuff you can do to transfer money illegally and leave the person who got the transfer on the hook for it. The reason they're dependent on the exchanges is that the exchange is by their currency reliably and safely.

It's not hard to imagine where a 50% fraud rate comes from with crypto with how many stories we see about hacks and wallet thefts. Strictly speak

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[jwdb]

Well, you've clearly made up your mind, regardless of the facts. Good luck with that.

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[TheRealMindChild]

Funny. Your comment is the only one moderated up, copy/pasting the same tired, wrong shit you do on every cryptocurrency post...

I posted on every cryptocurrency thread

[rsilvergun]

Because it bears repeating. Cryptocurrency is incredibly destructive and pernicious institution and the sooner it goes away the better. It wastes tons of resources while facilitating Ponzi schemes and money laundering and it's grown large enough that it might destabilize the economy as a whole. I'm also more than a little better that I can't buy an upgraded GPU but to be honest the thought of the entire US economy collapsing because of morons speculating ones and zeros kind of makes that seem like a lot les

A fool and his money are soon parted.

[couchslug]

Why is this news? No one who doesn't deserve to suffer for being greedy will be harmed.

FUD

[Paleolibertarian]

Means Fear Uncertainty and Dread. Which means the government is scared poopless that they won't be able to regulate/watch/confiscate your money whenever they like.

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[splutty]

Here's an NFT of some Kool Aid.