Tech Advances Associated With DeFi Could ‘Profoundly Affect’ Financial Market Trading, Says US Fed Governor

A crypto-skeptic US Federal Reserve governor says technology advances associated with decentralized finance (DeFi) could complement its centralized finance counterpart.

In a speech earlier this week in Vienna, Austria, Fed Governor Christopher J. Waller said DeFi tech could lead to efficiency gains, though he also stressed the value of centralized financial markets.

“It is easy to see how the emergence of these technologies could lead one to think of DeFi as a substitute for centralized finance. For example, the technologies are allowing for individuals to trade assets without giving up control of those assets to an intermediary – a critical distinction with centralized finance.

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.”

Waller also argues that it isn’t possible to “completely decentralize finance.”

“Intermediation is still valuable for the average person, and we see this by the existence of trading exchanges in the crypto world. All these platforms involve giving custody of one’s crypto-assets to an intermediary, who conducts trades on behalf of the client. This reintroduces the need for trust in these platforms just as trust is needed in modern banking systems.”

The Fed governor argued in a separate speech in February that digital assets are like baseball cards and have no intrinsic value.

“To me, a crypto-asset is nothing more than a speculative asset, like a baseball card. If people believe others will buy it from them in the future at a positive price, then it will trade at a positive price today. If not, its price will go to zero.

If people want to hold such an asset, then go for it. I wouldn’t do it, but I don’t collect baseball cards, either. However, if you buy crypto assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses.”

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