Is DeFi just a “grand illusion”?

Agustín Carstens, Director General of the Bank for International Settlements (BIS), finds clear words when it comes to distributed ledger technology. Like it in one Report from Bloomberg meaning, he says, advocates of a decentralized future of money are fooled. Their plan is to democratize finance by eliminating big banks and other middlemen. But this is de facto not what these financial applications would ultimately achieve, said Carstens on Tuesday at an event in Frankfurt.

Decentralization can be a noble goal. In many cases, governance improves when power is truly diffused, with appropriate controls and balances. This principle is enshrined in free and competitive markets. But this principle is not what DeFi applications offer. There is a big gap between vision and reality

, explained Carstens during a lecture at the Frankfurter Institute for Law and Finance (ILF). This skepticism is not surprising, as the BIS director has often expressed skepticism about digital assets in the past. In his opinion, self-executing protocols or smart contracts cannot cover every possible scenario. Instead, they rely on individuals writing and updating the code.

BIS boss praises regulation of stablecoins

Additionally, certain characteristics of DeFi blockchains favor the concentration of decision-making power in the hands of a few token holders, Carstens said. For example, transaction validators would need to receive sufficient compensation to give them “the right incentive” to participate, he says. Stablecoins are a more stable and better alternative. However, provided that

they are appropriately regulated to mitigate the risks they pose, such as B. defaults, risks to the payment system and the concentration of economic power to address.