Fed’s Waller: DeFi’s tech innovations could improve centralized finance

Federal Reserve Governor Christopher Waller said the technological innovations stemming from decentralized finance are largely complementary to centralized finance and can help improve it.

Details: Speaking in Vienna, Waller said:

• Distributed ledger technology can be an efficient way to keep records in a 24/7 trading world but before these ledgers can be used to facilitate transactions in traditional assets, the assets must be tokenized.

• Smart contracts can combine multiple legs of a transaction into a single unified act and this functionality could expand to a broad set of financial activities.

• Stablecoins, which are effectively digital currency, can reduce the need for payment intermediaries but their safety is not assured unless appropriate guardrails can be erected to minimize run risk and other risks, such as their potential use in illicit finance.

ICBA View: In a letter to IOSCO endorsing its call for market regulators to identify people or organizations responsible for developing and maintaining DeFi protocols, in order to hold them accountable to any applicable regulatory framework, ICBA expressed skepticism that DeFi will ever be truly decentralized. ICBA noted that despite claims to the contrary from crypto proponents, DeFi organizations fulfill the roles found in traditional financial systems, such as brokers or exchanges, thus they should be held accountable for failures and misdeeds.

More: Stablecoins do not act as “safe havens” during crypto market stress; instead, their market capitalization drops after significant shocks, according to a recent Bank for International Settlements working paper.

Article: As lawmakers continue to debate a regulatory framework for stablecoins, the latest Independent Banker magazine highlights how ICBA remains engaged to ensure that policymakers address the concerns of community banks.