Over-collateralization and regulation will limit the continued exponential growth of the DeFi sector in the coming years. Analysts at Morgan Staley came to these conclusions.
Investment bank experts noted that they did not find much evidence for the thesis that DeFi protocols significantly improve the traditional financial system.
“Projects look like a way to attract cash flows to enrich their operators. DeFi is prone to hacking and the risk of financial crime because of its anonymity,” they wrote. The absence of KYC/AML will limit adoption among institutions, and the integration of these requirements will make DeFi more centralized, the experts explained.
“Excessive collateral in lending/borrowing does not increase the money supply. Without centralization, DeFi will be more difficult to consider as an alternative to the current fractional reserve banking approach,” the analysts stressed.
Recall that in August 2021, the head of the SEC, Gary Gensler, warned of increased regulation of DeFi. He later emphasized that the decentralized nature of projects does not provide immunity from agency oversight.
Subsequently, the regulator has developed amendments to the Securities Act, affecting the regulation of automatic trading systems (ATS). SEC Commissioner Hester Pierce said they could threaten DeFi platforms.
Earlier, the Bank for International Settlements called the decentralization of DeFi protocols an illusion. The experts expressed confidence that there will be occasions when projects require reorganization or evaluation.