Morgan Stanley Doesn’t Think DeFi Growth Has Legs

A Morgan Stanley report has said the growth in decentralized finance (DeFi) could be set to slow down soon, due to regulation and overcollateralization concerns, CoinDesk wrote Tuesday (March 22).

Central bank easing programs have made it so investors have had to look for returns in new places. This has helped boost the total assets locked in DeFi to around $200 billion from around $600 billion in 2020, according to Morgan Stanley.

DeFi projects have offered high returns in a bid to get more users, and that has boosted the value of the platform.

The report noted that there might be an appeal to the idea of having no middlemen, with proponents touting DeFi as a way to boost the financial system. However, Morgan Stanley said it doesn’t see much evidence to support that.

“Rather DeFi protocols often seem to us as a way to attract cash flow to enrich the protocol operators,” the report from last week said. “DeFi is hack-prone and at risk of financial crime given anonymity is a key feature.”

The report also noted there’s a lack of know your customer (KYC) and anti-money laundering (AML) information which could limit institutional adoption, and implementing those things could force DeFi to be “more centralized.” Additionally, overcollateralization in lending and borrowing will mean DeFi lending doesn’t expand its money supply for the same crypto.

With that, and without centralization, DeFi will face steeper hurdles to be seen as an alternative to the current system. As such, Morgan Stanley has predicted that DeFi may remain small for the coming future.

Morgan Stanley didn’t respond to a PYMNTS email asking about the original source report.

PYMNTS wrote that DeFi aims to offer democratic governance without any human management, with all issues being decided by token-holder voting.

See also: Top DeFi Exchange SushiSwap Builds in Controls as AML Measures Loom

SushiSwap, the 14th-largest decentralized exchange, voted earlier this year on whether to make a Swiss-incorporated foundation “in order to mitigate future risks.”

The proposal will provide the decentralized autonomous organization-run DeFi project with clarity on the rights and obligations of token holders and contributors. It will also limit liability and make an apparatus to manage administrative issues.