What Banks Think About Decentralized Finance

I got a tweet the other day pointing me to a report from the Financial Stability Board about the use of decentralized technologies for financial services.

Clicking through to read the report, from June this year, it is interesting. It notes that decentralizing finance can be effective in areas like payments and trade finance, but that there is not one way of doing this.

There is:

  • Decentralization of decision-making. This involves a move away from a single trusted financial intermediary or infrastructure towards systems in which a broad set of users is able to make decisions about whether and how to undertake financial transactions.
  • Decentralization of risk-taking. This involves the shift away from the retention of risk (e.g. credit and liquidity risk) on the balance sheets of individual traditional financial intermediaries towards more direct matching of individual users and providers of financial services.
  • Decentralization of record-keeping. This involves a move away from centrally held data and records, towards systems in which the ability to store and access data is extended across broader consortia of users. Verification of such data and records may also be more distributed, for example via consensus mechanisms.

Here’s the full intro:

Financial technology (FinTech) is changing many facets of finance. These include retail and wholesale payments, financial market infrastructures, investment management, insurance, credit provision, and capital raising. Global investment in FinTech rose to a record US$112 billion in 2018. Nascent technologies such as distributed ledgers, cloud services, big data, and artificial intelligence (AI) are being tested for a wide variety of financial operations, to make them faster, more robust and less costly.5 Their impact on financial services could be broad, and their applications include the settlement of interbank payments and the verification and reconciliation of trade finance invoices. They may also play a role in executing, enforcing and verifying the performance of contracts.

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