DeFi’s Growth Sparks Concerns From Regulators: Elizabeth Warren Calls Crypto “The New Shadow Bank”

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Senator Elizabeth Warren has called crypto “the new shadow bank” in an interview with The New York Times. The interview was part of a broader article by the New York Times that discussed how Defi is disrupting the banking industry.

Warren has shared her views on cryptocurrency on numerous occasions, penning a letter to Treasury Secretary Janet Yellen in which she urged the Treasury Secretary to “act with urgency” on the regulation of the cryptocurrency market. SEC Commissioner Gary Gensler has also expressed his belief that crypto investors need to be wary of investing into cryptocurrency, and that crypto platforms must abide by existing securities laws.

In the recent interview Warren noted the following:

“Crypto is the new shadow bank. It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system. It’s like spinning straw into gold.”

The senator voiced her concerns on Stablecoins, and went as far as to suggest that regulators could ban banks in the United States from holding cash deposits backing up stablecoins, as a way to halt this nascent industry.

The chairman of the Securities and Exchange Commission, Gary Gensler, shares Warren’s views when it comes to encouraging caution with cryptocurrencies.  In response to Warren’s letter to the chairman, Gensler noted: “We need additional authorities to prevent transactions, products and platforms from falling between regulatory cracks,”

While regulators and some members of the US congress are concerned with cryptocurrencies, it is DeFi that is causing ripples across the political and traditional finance space. 

Decentralized Finance provides a transparent alternative to traditional financial services, offering financial products to individuals and organizations that are not controlled by a centralized body, but rather controlled by protocols and smart contracts. The elimination of middlemen, and access to finance to otherwise unbanked individuals, makes DeFi an attractive service to individuals and companies alike. 

Nonetheless, regulators are not fond of DeFi. The SEC in particular, has been quick to propose and implement regulation of this industry, recently employing the blockchain analytics firm AnChain.AI to help it to regulate and monitor the DeFi industry. The definition of whether a crypto or token is a security of commodity has seen regulators hand out various lawsuits, with the current Ripple Vs SEC lawsuit being observed closely by many in the industry.

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