On Friday, Federal Reserve Governor Christopher J. Waller spoke about whether DeFi is a substitute or complement to centralized finance. He concluded the two were complementary and also made positive statements about tokenization and stablecoins. Given these are his personal views, they don’t necessarily represent the Federal Reserve’s stance.
He noted that decentralized finance enables people to trade assets without giving up control of those assets to an intermediary. He considers yielding control of assets is a trademark of centralized finance.
At the same time, plenty of traditional financial institutions are also experimenting with DLT and smart contracts. One example is intraday repo trading using tokenization, where he sees the potential risk reduction from delivery versus payment. Another key benefit is the speed of settlement, which supports intraday transactions.
“Rather than relying on each party to separately carry out the transaction, smart contracts can effectively combine multiple legs of a transaction into a single unified act executed by a smart contract. This can provide value as it can mitigate risks associated with settlement and counterparty risks by ensuring the buyer will not pay if the seller does not deliver.”
“While these efforts are still in early stages, the functionality could expand to a broad set of financial activities. The bottom line is that things like DLT, tokenization, and smart contracts are just technologies for trading that can be used in defi or also to improve efficiency in centralized finance. That is why I see them as complements.”
He went on to discuss the benefits of stablecoins as reducing the need for intermediaries, lowering the cost of payments. While stablecoins suffer from run risks, guardrails could address these, making them serve as “a safe asset on a variety of new trading platforms.”
That said, he noted there is certainly still the need for centralized finance as exemplified by most cryptocurrency clients holding their assets at a cryptocurrency exchange.
These new technologies “have the potential to improve centralized finance, thereby increasing the significant value that financial intermediaries and centralized financial markets deliver. I look forward to seeing the continued evolution of financial technology and the benefits that evolution will bring to the households and businesses served by the financial system.”
