5/30/2023 0 Comments Decentralized financeThe DeFi finance market, nonexistent just a few years ago, has now grown into an industry worth hundreds of billions. The blockchain is essentially a public ledger for digital assets, including cryptocurrencies.ĭeFi can involve lending crypto, sending crypto, or investing crypto.Īnd crucially, DeFi happens without a central authority, or the involvement of banks or other traditional financial organizations, hence “decentralized.” Some of the most popular DeFi applications include Uniswap and Curve Finance. The views expressed in the comment are those of the discussant and do not necessarily reflect those of Yale School of Management.DeFi refers to financial applications built on blockchain technology that enable digital transactions between multiple parties. (The Narrow Bank), which was a Connecticut-based depository institution. He was a cofounder and board member of TNB USA Inc. Gary Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. “Comment on ‘Cryptocurrencies and Decentralized Finance (DeFi)’.” Brookings Papers on Economic Activity, Spring. “Cryptocurrencies and Decentralized Finance (DeFi).” Brookings Papers on Economic Activity, Spring. “If regulators wait too long,” they write, “in effect cryptocurrencies and DeFi applications can become too-big-to-regulate.”ĭavid Skidmore authored the summary language for this paper. However, the exponential growth of cryptocurrencies and the growing political clout of the crypto community means time is short for finding regulatory solutions, the authors caution. interest to encourage innovation and modern financial technologies but at the same time set standards that protect consumers and maintain the transparency and accountability of the system.” financial system and conclude, “therefore it is in the U.S. They note that the United States enjoys “significant economic and strategic benefits” from the central role of the dollar and U.S. How the technology and regulation of the DeFi system evolve has important consequences for the global economy and ultimately to the United States’ standing in it, the authors write. “If regulators wait too long, in effect cryptocurrencies and DeFi applications can become too-big-to-regulate.” Regulators could certify validators to ensure they check that addresses on cryptocurrency networks belong to certified entities and then only process transactions to and from certified addresses. The authors then highlight ways to regulate the DeFi system which would “preserve a majority of features of the blockchain architecture but support accountability and regulatory compliance.” They propose regulatory oversight of validators-the blockchain network participants who ensure the integrity of the blockchain ledger (the decentralized record of transactions) and who are paid in cryptocurrency for verifying transactions. The authors lay out potential benefits and challenges of the new system, including the difficulty of providing effective consumer financial protections. The paper explains how decentralized finance works and the mechanics behind it, such as the security protocols of different cryptocurrency blockchains and smart contracts (embedded computer code that automatically executes transactions when predetermined conditions are met). DeFi generates challenges for enforcing tax and money laundering laws and preventing financial malfeasance, and as a result can create negative spillovers on the rest of the economy. The permissionless and pseudonymous design of DeFi applications can severely limit the ability of regulators to oversee the industry and restrict unscrupulous actors.
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