US Senator Claims DeFi is the Most Dangerous Area of Crypto

Elizabeth Warren, the US Senator, called on regulators for clamping down on stablecoins and decentralized finance (DeFi) before it is too late. The senator said that DeFi was the most dangerous aspect of the crypto space because it allows the swindlers, cheats and scammers to mix amongst the first-time crypto traders and part-time investors. These statements were made by the senator on Wednesday during a hearing of the Senate Banking, Housing and Urban Affairs Committee. She also discussed stablecoins, such as usd coin (USDC) and tether (USDT). Open Markets Institutes’ director of financial policy, Alexis Goldstein elaborated that the stablecoins might not always be backed because most of the assets that back them are not really dollars. 

According to Warren, the report provided by Tether itself showed that only 10% of the assets that are used for backing the stablecoin are actually in the form of dollars in the bank. The remaining 90% are not real dollars and are something else. Furthermore, she added that a government regulator had not verified this statement and neither had it been verified through an audited financial statement. Warren said that stablecoins were not stable all the time and said that it was actually a lot worse. 

She said that during tough economic situations, people are more likely to move into real dollars and cash out of risky financial products. Thus, Warren said that these stablecoins would decline in value just when people need them the most and the whole economy could crash because of this run-on-the-bank approach. The senator stated that decentralized finance was the most risky element of the crypto world. She said that regulation was completely absent in this area and said that people couldn’t even tell if they were dealing with terrorists. According to her, stablecoins serve as the lifeblood of the decentralized finance world. 

She said that stablecoins were needed in Defi for trading between different coins, for borrowing and lending money and for trading derivatives, all of which was not a part of the regulated banking system. Warren said that DeFi would come to a halt without stablecoins. The American University College of Law’s professor, Hilary Allen also responded to questions during the hearing about the risk to the US financial system because of stablecoins. Allen said that defi couldn’t possibly grow without stablecoins and would struggle. The professor said that defi hadn’t grown enough to impact the financial stability, but its continued growth could be a real threat, especially if it becomes intertwined with the traditional financial system.

Senator Warren emphasized that there was no regulations pertaining to stablecoins and there were no guarantors or independent auditors. She added that these had propped up the defi space, which was the shadiest aspect of the crypto industry because people can get scammed easily. The senator said that this was a risk for the traders as well as the economy. According to her, it is time to act and the regulators need to get serious about clamping down on this aspect.