Crypto exchanges often reintroduce the very same intermediary role that DeFi aims to eliminate.
One of the key benefits Waller discussed was the potential for distributed ledger technology (DLT), tokenization, and smart contracts to enhance the speed and accuracy of financial transactions. According to Waller, centralized finance relies on regulatory frameworks to ensure financial stability and prevent illegal activities, and similar guardrails may be necessary in the DeFi space.
He argued that intermediaries still serve a valuable function for most individuals.
Waller stated that the idea that finance can be fully decentralized is unrealistic.
Federal Reserve Governor Christopher Waller believes that DeFi is more likely to work alongside traditional finance rather than replace it entirely. That is why he sees them as complements. These technologies could be especially useful for tasks like recordkeeping in a 24/7 trading environment.
For instance, smart contracts can automatically execute complex transactions by ensuring all terms are met, potentially reducing the settlement risks typically associated with manual processes. He acknowledged that the benefits of centralized systems, such as reducing transaction costs and ensuring trust, still hold value in today’s evolving financial landscape. He added that DeFi platforms may reduce the need for certain intermediaries, but the need for trust in financial systems remains paramount. However, Waller emphasized that DeFi’s efficiencies come with challenges, particularly regarding regulatory oversight and security.
He raised concerns about the risks posed by decentralized systems, including the potential for illicit financing and the absence of established trust mechanisms that are foundational to centralized finance. During his speech at the Vienna Macroeconomics Workshop, Waller discussed the ongoing debate surrounding DeFi’s role in the financial system, acknowledging its innovations but emphasizing the enduring value of centralized finance.
Waller highlighted that intermediaries, or “middlemen,” remain crucial for managing the complexities of financial trades. DeFi has brought new technologies that can improve efficiency but cannot substitute for the complex and trusted systems that centralized finance has developed over centuries.
While DeFi introduces technological advancements that could streamline and lower the cost of financial activities without intermediaries, Waller cautioned against the notion of a completely decentralized financial system. Waller also highlighted that several financial institutions are already experimenting with DLT to improve traditional trading methods, such as the use of blockchain in repo markets.
Waller stated that technologies like DLT, tokenization, and smart contracts are just trading technologies that can be used in DeFi or to improve efficiency in centralized finance.
