‘DeFi is the most dangerous part of the crypto world,’ says Senator Elizabeth Warren

The U.S. lawmaker claimed that the value of stablecoins would “take a nosedive,” with small investors largely feeling the effects of a potential downturn.

Massachusetts Senator Elizabeth Warren did not hold back in her criticism of decentralized finance, expressing concern about how a run on stablecoins would affect the average investor.

In a Tuesday hearing with the Senate Banking Committee discussing stablecoins, Warren questioned Professor Hilary J. Allen of the American University Washington College of Law as to whether a run on stablecoins could potentially endanger the U.S. financial system. Though Allen said an “en masse” redemption of stablecoins from people who had lost faith in the tokens would be unlikely to have “systemic consequences” for traditional markets at present, the DeFi system would be more likely to feel the effects.

Warren countered that because stablecoins provided “the lifeblood of the DeFi ecosystem” outside of regulated markets, she believed their value would “take a nosedive precisely when people most need stability” with the impact affecting traditional finance.

“DeFi is the most dangerous part of the crypto world,” said Warren. “This is where the regulation is effectively absent, and — no surprise — it’s where the scammers and the cheats and the swindlers mix among part-time investors and first time crypto traders. In DeFi, someone can’t even tell if they’re dealing with a terrorist.”

Allen added that the potential threat Warren posited may be in DeFi’s future without addressing her claim on illicit transactions:

“I don’t think DeFi can grow without stablecoins. I think it would struggle. Right now, I think DeFi is contained to the point where it won’t impact financial stability, but if it grows, I think there’s a real threat there, particularly if it becomes intertwined with our traditional financial system.”

The discussion among U.S. lawmakers present at the hearing, named Stablecoins: How Do They Work, How Are They Used, and What Are Their Risks?, follows committee chair Sherrod Brown requesting crypto firms release information related to consumer and investor protection on stablecoins. Professor Allen appeared at a witness alongside 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.

Related: Regulators are coming for stablecoins, but what should they start with?

Warren has previously used hearings and public statements to claim cryptocurrencies are mainly tied to illegal activities. In a June hearing discussing central bank digital currencies, the Massachusetts senator said the “crypto world currently has no consumer protection” and referred to many tokens as “bogus” investments. She has also criticized the Ethereum network’s high transaction fees during periods of price volatility.