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Decentralized finance (DeFi) leverages innovative technologies and can shape the future of finance. However, it is too technologically and economically complex, and a deep understanding of DeFi is still lacking in the market, says a new paper by the Bank for International Settlements (BIS).
In its paper, the BIS defines DeFi as “a competitive, contestable, composable, and non-custodial financial ecosystem built on technology that does not require a central organization to operate and lacks a safety net.” DeFi targets financial disintermediation, with users only interacting with smart contracts and not a central entity.
The BIS has been anti-DeFi for years, stating in December that it is more fragile than advertised and poses “severe challenges to tax enforcement, exacerbating problems with money laundering, and other types of financial irregularities.”
In its new paper, it now claims that DeFi is too complicated for most people. It was further shown that DeFi, despite claims of decentralization, is still subject to the same risks that traditional finance has faced for centuries.
“Additionally, the promise of transparency and stability in DeFi is not necessarily guaranteed, as exemplified by the investigation into the stablecoin Tether,” the paper states.
In the paper, the BIS investigates in detail settlements in DeFi, use of digital assets, various DeFi protocols — which include decentralized exchanges, lending protocols, and derivative protocols — and the composition of DeFi.
BIS concluded that regulators can no longer afford to ignore DeFi as digital assets continue to be integrated into mainstream financial systems.
The DeFi papers come just a week after the BIS asked regulators to ban, restrain or regulate digital assets. The bank believes that central banks can also entice users away from digital assets by making TradFi more attractive. The Brussels-based bank points out that a central bank digital currency (CBDC) is a good starting point and can lead to sound financial innovation.
Watch: The Future of Financial Services on Blockchain – More Efficiency & Inclusion
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