Decentralized Finance (DeFi)

Abstract

DeFi – ‘Decentralized Finance’ – is the latest buzzword in the world of FinTech, RegTech, cryptocurrencies and digital assets. Yet little is really known about its meaning, legal implications and policy consequences. This paper introduces DeFi, puts DeFi in the context of the traditional financial economy, connects DeFi to Open Banking and ends with some policy considerations. We suggest that decentralization has the potential to undermine traditional forms of accountability and potentially erodes the effectiveness of traditional financial regulation and enforcement. At the same time, where parts of the financial services value chain are decentralized, there will be a reconcentration of a different (but possibly less regulated, less visible and less transparent) part of the value chain. DeFi regulation supervision could and should focus on this reconcentrated part to ensure effective oversight and risk control. Looking more broadly, decentralized finance offers the potential for an entirely new way to design regulation, building regulatory approaches into DeFi as a design feature, potentially decentralizing both finance and its regulation: the ultimate expression of RegTech.