Government Addresses DeFi’s Impact On Traditional Financial System

In response to a Rajya Sabha query on the emerging Decentralized Finance (DeFi) sector and its potential implications for India’s traditional financial system, Minister of State for Finance Pankaj Chaudhary, provided insights into the government's assessment and plans. The response highlighted both the opportunities and risks associated with DeFi.

Government’s Concerns on DeFi Risks

The government highlighted the risks posed by the emerging Decentralized Finance (DeFi) sector to macroeconomic stability, financial integrity, and consumer protection. As part of India’s G20 Presidency, the IMF and the FSB produced a Synthesis Paper on Policies for Crypto Assets, which outlines the risks associated with the crypto asset ecosystem, including DeFi and stablecoins.

Additionally, the FSB’s 2023 report, The Financial Stability Risks of Decentralised Finance, further explores the vulnerabilities of DeFi, particularly its decentralized nature and lack of regulation. The response also noted the absence of a regulatory framework for crypto assets in India, with the Reserve Bank of India (RBI) issuing periodic warnings on the associated risks.

Development of a Regulatory Framework

In Pankaj Chaudhary’s response, the Ministry highlighted the importance of establishing a regulatory framework for DeFi to balance innovation with risk mitigation. The global frameworks from the IMF and FSB, which consider the specific challenges of emerging markets like India, support innovation while addressing risks. But the statement noted that regulatory approaches to DeFi are still in the early stages worldwide, with regulators initially concentrating on stablecoins and unbacked cryptocurrency assets before embracing DeFi.

Financial Literacy and Consumer Awareness

In their response, the Ministry emphasised the importance of financial literacy, especially in relation to decentralised financial products. Although no specific activities were mentioned, the Ministry stressed the importance of educating consumers about the advantages and possible risks of using DeFi. This awareness is vital to empower users, enabling them to make informed decisions within the decentralized finance landscape.

The government is actively monitoring the changing DeFi scene and wants to address domestic challenges while aligning regulatory efforts with global norms.