Senator Elizabeth Warren: DeFi is the most dangerous part of the crypto world

Senator Elizabeth Warren of Massachusetts has not held back when she criticizes decentralized finance (DeFi), expressing concern about how a run on stablecoins will affect ordinary investors.

At Tuesday's Senate Banking Committee hearing on stablecoins, Warren asked Hilary Allen, a professor at the American University Washington School of Law, whether a run on stablecoins could endanger the U.S. financial system. While Allen said that the "collective" redemption of stablecoins by those who have lost faith in stablecoins is currently unlikely to have "systemic consequences" for traditional markets, the impact will be more likely to be felt in the DeFi system.

Warren countered that since stablecoins provide “the lifeblood of the DeFi ecosystem” outside of regulated markets, she believes their value will “plummet at a time when people need stability most,” with repercussions affecting traditional finance.

"DeFi is the most dangerous part of the crypto world," Warren said. “This is where regulation doesn’t really exist, and — unsurprisingly — this is where scammers and fraudsters mingle with part-time investors and first-time crypto traders. In DeFi, someone can’t even tell if they’re in dealing with terrorists."

Allen added that the potential threat Warren raised could be in the future of DeFi, but did not address her claims about illicit transactions.

“I don’t think DeFi can grow without stablecoins. I think it’s going to struggle. Right now, I think DeFi is contained to the point where it doesn’t affect financial stability, but if it grows, I think there’s a real threat, especially if it becomes intertwined with our traditional financial system."

The topic of discussion among U.S. lawmakers attending the hearing was "Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?" - Committee Chair Sherrod Brown Asks Cryptocurrency Companies to Issue Consumer and Investor Protections Related to Stablecoins after the relevant information. Allen appeared as witnesses along with Alexis Goldstein, director of financial policy at Open Markets, Jai Massari, a partner at Davis Polk & Wardwell, and Dante Disparte, chief strategy officer and head of global policy at Circle.

Warren has previously used hearings and public statements to claim that cryptocurrencies are primarily associated with illicit activities. During a June hearing to discuss central bank digital currencies, the Massachusetts senator said that “there is currently no consumer protection in the cryptocurrency world” and called many tokens “fake” investments. She also criticized the ethereum network for its high transaction fees during periods of price volatility.