The Organisation for Economic Cooperation and Development (OECD) analyzed the crypto winter in a new policy paper titled “Lessons from the crypto winter: DeFi versus CeFi” released Dec. 14. The authors examined the impact of the crypto winter on retail investors and the role of “financial engineering” in the industry’s current problems and found a lot not to like.
The paper from the OECD, an intergovernmental body with 38 member states dedicated to economic progress and world trade, concentrated on events in the first three quarter of 2022, and placed the blame for them squarely on a lack of safeguard due to “non-compliant provision of regulated financial activity” and the fact that “some of these activities may fall outside of the existing regulatory frameworks in some jurisdictions.”
The report noted that institutional market participants exited their positions sooner than retail investors, who may have even continued to invest as the market collapsed. Investors in TerraUSD (UST), for example, had “little understanding of the circular and reflexive character of the so-called stablecoin, which had no tangible value.” Meanwhile, contagion spread through the industry due to its high interconnectivity.
The crypto winter also “exposed new forms of financial engineering” that had a negative effect on the market. According to the report:
“Developments such as liquid staking, creating derivatives backed by illiquid locked assets, create extreme liquidity transformation risk and maturity mismatches. Consecutive rounds of re-hypothecation of crypto-assets that are considered by platform clients to be lent and/or ‘locked’ as collateral create risks related to high leverage and liquidity mismatches in crypto-asset markets.”
Many of those practices derive from the “composability” of DeFi, that is, the ability to combine smart contracts to create new products, and the practices continue unabated, the report said.
1/Excellent new research by the OECD on the role of #CeFi and #DeFi in the crypto turmoil. #Crypto advocates may try to fault centralized players, but do not overlook the role of DeFi. Smart contract flaws + leveraged trading fueled volatility. https://t.co/EVCRhp3y0a pic.twitter.com/lWA2PeUclw
— Brian Laverdure, AAP (@brian_laverdure) December 14, 2022
The authors wade into the CeFi/DeFi divide within crypto, noting that DeFi worked “without issues” in the first half of the year, although DeFi’s automated…
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