On DeFi and on-chain CeFi: How (not) to regulate decentralized finance (DeFi)
The Journal of Financial Regulation (JoFR) published a paper that offers a framework to assess the factual decentralization of blockchain-based decentralized finance (DeFi) financial infrastructures, which is crucial for regulatory assessments. It explores various potential sources of centralized control, either endogenous or through inherited dependencies on other projects (“centralization vectors”). It finds that many DeFi projects are subject to such vectors that are likely critical, and taking them into account substantially reduces the number of DeFi projects that are genuinely decentralized. The paper argues that if a project has significant centralization vectors it can and likely should be regulated. On the other hand, for truly decentralized projects, the regulatory focus should remain on the on- / off-ramps to / from the spheres of on-chain centralized finance (CeFi) and (traditional) CeFi. [Read more at the JoFR].
Hong Kong still cautious about introducing a retail CBDC
Hong Kong Monetary Authority (HKMA) CEO Eddie Yue remains skeptical about the benefits of a retail central bank digital currency (CBDC). He started by listing some of the potential benefits, including serving as a fundamental layer to facilitate interoperability and interlinking between various future digital economy participants. Also, it could act as a bridge between different types of privately-issued digital money, and ensure all private money to be exchangeable with a public money on demand and at par. He also envisioned that a retail CBDC could be a potential “backbone” and anchor, bridging a legal tender and digital assets, offering price stability and confidence needed to empower more innovations, and developing a vibrant sector and ecosystem for digital assets in Hong Kong. Nevertheless, Mr. Yue said that more research is needed on whether its benefits outweigh the risks, particularly “given the generally efficient and competitive retail payment ecosystem in Hong Kong” [and the HKMA] will continue to take a use-case driven approach in thinking about whether and when to introduce a retail CBDC.” [Read the full speech at the HKMA]
Atlantic Council calls for global interoperability standards for CBDC
The Atlantic Council published an updated version of their “Standards And Interoperability: The Future Of The Global Financial System” white paper calling for calling for global CBDC interoperability standards. It sets some common definitions and understanding of the current state of international standards for those seeking to understand the current state of international standards and existing gaps and areas for improvement. It also notes that, standards ensuring consistency and seamless functionality are not static; they must be flexible enough to accommodate advancements in digital currency technology, shifts in economic priorities, and changing societal perspectives on digital assets. [Read more at the Atlantic Council]
Kiffmeister’s central bank digital currency monthly monitor
Just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So (only) if you work at a central bank, ministry of finance or international financial institution (e.g., the BIS, IMF, OECD, World Bank) and who would like to receive it by email on the first business day of every month, please DM me on LinkedIn or email me at chronicles@kiffmeister.com.
