On Friday, Federal Reserve Chairman Christopher J. Waller spoke about whether DeFi will replace or complement centralized finance. He also spoke positively about tokenization and stablecoins, concluding that the two are complementary. These are his personal views and do not necessarily represent the Fed’s position.
He pointed out that decentralized finance allows people to trade assets without surrendering control of them to intermediaries. He believes that ceding control of assets is a trademark of centralized finance.
At the same time, many traditional financial institutions are also experimenting with DLT and smart contracts. One example is intraday repo trading using tokenization. He sees potential risk reduction from shipping and payments. Another important advantage is the speed of settlement, which supports intraday trading.
“Rather than relying on each party to execute the transaction separately, smart contracts can effectively combine multiple parts of a transaction into a single unified act performed by the smart contract. This provides value by reducing payment-related and counterparty risk by ensuring that the buyer will not pay if the seller fails to deliver.”
“While these efforts are still in their early stages, this functionality could be extended to a wide range of financial activities. The bottom line is that DLT, tokenization, smart contracts, etc. can be used in defi and It’s just a transactional technology that can also be used to improve. That’s why I see them as complementary.”
He went on to discuss the benefits of stablecoins, which reduce the need for intermediaries and lower payment costs. Stablecoins suffer from execution risks, but guardrails could address these and allow stablecoins to serve as “safe assets across a variety of new trading platforms.”
That said, he noted that there is certainly still a need for centralized financing, as exemplified by the fact that most crypto customers hold their assets on crypto exchanges.
These new technologies have the potential to improve centralized finance and thereby enhance the significant value provided by financial intermediaries and centralized financial markets. We look forward to the benefits it will bring to households and businesses served by the financial system.”
