The Swiss Financial Market Supervisory Authority (FINMA) has warned of the long-term risks relating to decentralised finance platforms for blockchain transactions.

In its latest risk monitor report for 2022, FINMA underlined the “inherent instability” of decentralised finance ecosystems that could spill over into, and put at risk as a consequence, the stability of traditional financial markets.

For financial institutions the risks linked to the use of decentralised finance applications are primarily operational, legal and reputational, with the risk of money laundering being high because of the anonymity of most decentralised finance applications, it added in the report.

Decentralised finance projects are hard to supervise and are “run, materially influenced or controlled” by just a few people or companies, FINMA said. A further problem is the lack of transparency because of very limited publicly available information.

Decentralised finance services, infrastructure and applications are considered an alternative to execute transitions in the financial sector.

Their spread can pose new challenges for regulators and supervisory authorities that are applying outdated rules dealing with new technological developments making it impossible to clearly define responsibilities and intermediaries, it said.

With open-access blockchain infrastructures such as Ethereum or Solana, financial transactions are automated, without financial intermediaries or a supervised trading venue, and with assets given as collateral for the use of decentralised finance applications, the regulator explained.

This year FINMA is considering decentralised finance as one of the long-term trends, and risks, just as climate risks and greenwashing last year.

Pension funds face crypto risks

The Swiss supervisory authority has approved last year the first crypto fund – Crypto Market Index Fund – for distribution to qualified investors, including pension funds.

Swiss pension funds, however, still seem reluctant to invest in crypto assets, considered an alternative investment under the occupational pension law BBV 2, despite the parliament making efforts to regulate the sector, passing the Distributed Ledger Technology (DLT) Act, distributing licenses to operate to financial intermediaries or companies for DLT trading systems.

In Canada, instead, Caisse de dépôt et placement du Québec (CDPQ) had written off $150m invested in cryptocurrency lending network Celsius Network.

Ontario Teachers’ Pension Plan had invested a $75m in now bankrupt crypto exchange FTX International and its US entity (FTX.US), and making a further investment of $20m in FTX.US, to gain exposure to an emerging area in the financial technology sector, it said in a statement.The financial loss resulting from the investment in FTX is less than 0.05% of the total net assets of the Ontario scheme.

Alameda Research, a trading firm that has also filed for bankruptcy founded by the former chief executive officer of FTX, Sam Bankman-Fried, backed the Solana platform and cryptocurrency that have been hit by the collapse of FTX.

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Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

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