Fed’s Waller says DeFi can improve efficiency in centralized finance

Key takeaways

  • Christopher Waller discussed the potential of DeFi to complement traditional finance.
  • Waller highlights the benefits and risks associated with stablecoins.

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DeFi can be a complement to centralized finance as these technologies can improve efficiency in traditional financial activities, Fed Governor Christopher Waller said at the Vienna Macroeconomics Workshop on Friday. He also sees DeFi as a substitute for centralized finance as it allows people to exchange assets without intermediaries.

“Rather than relying on each party to carry out the transaction separately, smart contracts can effectively combine multiple parties of a transaction into a single unified act executed by a smart contract. This can add value as it can mitigate the risks associated with settlement and counterparty risks by ensuring that the buyer will not pay if the seller defaults. While these efforts are still in the early stages, the functionality could be expanded to a broad set of financial activities,” Waller saying.

“Things like DLT (distributed ledger technology), tokenization and smart contracts are just technologies for trading that can be used in DeFi or also to improve efficiency in centralized finance. That’s why I see them as complements,” he added.

Waller also discussed the benefits and drawbacks of financial intermediaries, which have often facilitated trade by reducing the time and cost associated with finding trading partners.

He noted that while intermediaries help connect buyers and sellers, they also introduce transaction costs and control problems, often leading to a misalignment of incentives between the principal and the agent.

Historically, technological advances have driven changes in finance, and DeFi represents the latest wave of innovation aimed at improving business processes.

Waller talked about the important role of stablecoins in DeFi. He described stablecoins as “effectively digital currency” that helps reduce the need for traditional payment intermediaries and reduce overall payment costs.

According to Waller, the technological underpinnings of DeFi, including blockchain and smart contracts, “will almost certainly lead to efficiency gains over time.”

While DeFi technologies offer promising benefits, there are concerns regarding their security, reliability and potential regulatory implications, Waller said. He also warned about the risks associated with stablecoins, including their potential use in illicit finance and the historical precedent of synthetic dollars facing runs.

The policymaker urged tailored regulations to maximize the benefits of DeFi safely. Additionally, he called for a balanced view that considers both the disruptive potential of DeFi and the lasting value of centralized financial systems.

“When it comes to our financial system, which affects every person or business in one way or another, I believe it deserves a balanced view of rapid disruption and long-term sustainability,” he said.

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