Speech by Gov. Waller on DeFi
AI summary of the linked articleFederal Reserve Governor Waller argues that decentralized finance (defi) is better understood as a set of technologies that can both substitute for and complement centralized finance, rather than as a full replacement. He says distributed ledgers, tokenization and smart contracts can speed trades and reduce settlement and counterparty risk in centralized markets, which is why he sees them as complements. He notes that stablecoins, which are nearly all pegged one-for-one to the U.S. dollar, could cut payment costs but remain subject to run risk. He also states that full decentralization is not possible, since crypto trading exchanges still require custody with intermediaries and trust. |
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1 comment macbudkowski.ethSubmitter Some interesting parts: "However, there are other uses emerging from these technologies that look more like complements to centralized finance. For example, distributed ledger technology, or DLT, may be an efficient and faster way to do recordkeeping in a 24/7 trading world. We already see several financial institutions experimenting with DLT for traditional repo trading that occurs 24/7. But before these ledgers can be used to facilitate transactions in traditional assets—like debt, equity, and real estate—these assets must be tokenized. Undertaking the process to tokenize assets and use distributed ledgers like blockchain can speed up transfers of assets and take advantage of another innovation: smart contracts. Rather than relying on each party to separately carry out the transaction, smart contracts can effectively combine multiple legs of a transaction into a single unified act executed by a smart contract. This can provide value as it can mitigate risks associated with settlement and counterparty risks by ensuring the buyer will not pay if the seller does not deliver. While these efforts are still in early stages, the functionality could expand to a broad set of financial activities. The bottom line is that things like DLT, tokenization, and smart contracts are just technologies for trading that can be used in defi or also to improve efficiency in centralized finance. That is why I see them as complements." (...) "Stablecoins are another important innovation in defi. Stablecoins were created in the crypto universe in hopes of providing a "safe" asset with a stable value for trading. Nearly all stablecoins are pegged to the U.S. dollar one-for-one. They provide an opportunity for buyers and sellers to transact in a decentralized fashion with the stablecoin used as the settlement instrument. Because they are effectively digital currency, stablecoins can reduce the need for payment intermediaries and thereby reduce costs of payments globally. But their safety is not assured. History is replete with cases in which synthetic dollars became subject to runs. Stablecoins thus face all of the same issues any substitute for genuine U.S. dollars faces. If appropriate guardrails can be erected to minimize run risk and mitigate other risks, such as their potential use in illicit finance, then stablecoins may have benefits in payments and by serving as a safe asset on a variety of new trading platforms." |