Decentralized Finance

Abstract

DeFi (‘decentralized finance’) has joined FinTech (‘financial technology’), RegTech (‘regulatory technology’), cryptocurrencies, and digital assets as one of the most discussed emerging technological evolutions in global finance. Yet little is really understood about its meaning, legal implications, and policy consequences. In this article we introduce DeFi, put DeFi in the context of the traditional financial economy, connect DeFi to open banking, and end with some policy considerations. We suggest that decentralization has the potential to undermine traditional forms of accountability and erode the effectiveness of traditional financial regulation and enforcement. At the same time, we find that where parts of the financial services value chain are decentralized, there will be a reconcentration in a different (but possibly less regulated, less visible, and less transparent) part of the value chain. DeFi regulation could, and should, focus on this reconcentrated portion of the value chain to ensure effective oversight and risk control. Rather than eliminating the need for regulation, in fact DeFi requires regulation in order to achieve its core objective of decentralization. Furthermore, DeFi potentially offers an opportunity for the development of an entirely new way to design regulation: the idea of ‘embedded regulation’. Regulatory approaches could be built into the design of DeFi, thus potentially decentralizing both finance and its regulation, in the ultimate expression of RegTech.

Promise of AI in Defi, A Literary Analysis

“…The benefits of DeFi and its limitations are studied by Chen et al [3]. A similar work is presented by Zetzsche et al [1], where they demonstrated several perspectives of how DeFi differed from traditional financial systems. They have gathered resources to architect the security concerns that DeFi poses to institutions and people and summarizes how DeFi can be regulated.…”

“…Decentralized Finance (DeFi) is inspired by FinTech 1 and the practical applicability of blockchain technology. Blockchain technology offers a decentralized, transparent platform for finance with no intermediaries for exchanges [1]. Lee et al, in their journal [2] defines FinTech and disruption of FinTech in modern times: the digital evolution of financial services provided to customers.…”

“…Absolute transparency is questionable to many legal terms till date since it seeks to demolish a controlled (centralized) system. Zetzsche et al dived into uncharted waters of DeFi where they proposed it requires regulation as any other financial body [1]. The authors pointed three perspectives from which DeFi faces legal obstacles: "Legal jurisdiction and applicable law, enforcement, and data protection and privacy".…”

“…Some scholars [12][13][14] have studied possible attacks on DeFi, while some scholars [15][16][17] have studied secure trading on DEX. 1 FinTech: Financial Technology; Any technology that delivers financial services through software.…”

Формирование Децентрализованных Финансовых Институтов В Качестве Альтернативы Кредитно-Финансовым Организациям

“…Схожей позиции придерживаются ученые Дирк А. Зетше, Дуглас В. Арнер и Росс П. Бакли [3]. В работе, посвященной децентрализованным финансам, они предположили, что данное направление в будущем может быть ассимилировано традиционным финансовым сектором.…”