DeFi Could Rely On CBDC, But More Bridges With Centralized Finance Are Needed – Expert Panel

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Source: AdobeStock / Andrii Yalanskyi

 

As decentralized finance (DeFi) and central banking share a number of objectives, building bridges between decentralized and centralized finance (CeFi) could open up new possibilities for the use of central bank digital currencies (CBDCs) , according to the participants of a debate held by the Innovation Hub of the Bank for International Settlements (BIS) and the Swiss National Bank (SNB).

Per this panel, DeFi and CBDC remain two distant spheres, but with the DeFi ecosystem continuing to mature, the space of common interest could expand. 

Moderator Thomas Moser, Alternate Member of the Governing Board of the SNB, said during the DeFi 22 event that DeFi’s potential stronger ties with CBDCs required policy-makers to answer questions such as: do we need a lender of last resort in DeFi?

Amit Chaudhary, Head of DeFi Research at Polygon (MATIC), argued that:

“All the regulation mechanics have objectives. We have central banks, and we have DeFi. Our objectives are the same: financial inclusion, reduced financial costs, privacy. Privacy is very important to users.”

Chaudhary added that “the last objective is financial stability, and you might be surprised to hear that … I’m seeing the owners of the protocol … doing stress tests now.”

He said he believed that “CBDC could come to lending protocols,” and that DeFi and central banks “could work in a collaborative way.”

Morten Bech, Head of the Swizerland Centre at BIS Innovation Hub, commented that central banking was designed to provide monetary and financial stability, and “in the new world of DeFi this will also be the case.”

Technological changes have the potential to alter what is considered a public good. Such was the case with broadcast television which started as a public good before being privatized as cable, satellite, and digital TV.

“Central banks should keep up with technology,” Bech said. “But I haven’t heard anything today that leads me to believe that monetary and financial stability, even in a world where you only have DeFi, that that wouldn’t be a public good. So you’d still need somebody to implement that. Does that have to be a central bank? No, not necessarily.”

Lex Sokolin, Head Economist and Global Fintech Co-Head at ethereum (ETH) and blockchain software company ConsenSys, said that “a lot of the conversation about CBDC is paying for the sandwich,” but “there’s still lot of pulling apart before we can say this is what a CBDC will be used for by the people who will end up using it within a DeFi context.”

He argued that,

“If you want to go for a retail CBDC that is really good for tax collection, or for distributing universal basic income … that’s a different use-case problem.” 

Meanwhile, for Andreas Glarner, Partner at Swiss law firm MME Legal, an increased use of CBDC in DeFi would not solve the major regulator problems faced by the decentralized sector.

“The DeFi landscape is very fragmented,” he said, and it has “a rather complicated user interface.” He added that, 

“The question is whether users would not prefer to deal through some form of intermediary and be more comfortable, have an intermediary in place that helps them access DeFi. At that point, we kind of move DeFi to CeFi, we build a bridge to DeFi.”

Intensifying CBDC development

Meanwhile, according to the major consulting company PwC the “race to digital money is on” — and “the future of money is digital.”

Per their April 4 report, retail CBDC projects (designed for public use) have overall reached greater maturity levels than wholesale projects did (those used by financial institutions that have accounts with central banks). However, the past year, they said, “has seen progress on a number of successful wholesale pilots.”

According to Haydn Jones, Blockchain and Crypto Specialist at PwC UK, central banks are “ramping up” activity in the digital currency space, though different countries stand at differing levels of CBDC maturity. Furthermore, each country has different motivating factors, which include increasing financial inclusion, facilitating cross border payments, and controlling financial crime. 

Jones added that,

“We expect CBDC research, testing and implementation will intensify in 2022. The success of Nigeria’s eNaira is likely to spur CBDC development in countries where financial inclusion is one of the key desired outcomes.”

John Garvey, Global Financial Services Leader at PwC United States, argued that if CBDCs can “ultimately enable more efficient payments, that will benefit everyone.”

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