Template-Type: ReDIF-Paper 1.0
Author-Name: Igor Makarov
Author-X-Name-First: Igor
Author-X-Name-Last: Makarov
Author-Name: Antoinette Schoar
Author-X-Name-First: Antoinette
Author-X-Name-Last: Schoar
Title: Cryptocurrencies and Decentralised Finance
Abstract: The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.
Creation-Date: 2022-12
File-URL: https://www.bis.org/publ/work1061.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1061.htm
File-Format: text/html
Number: 1061
Keywords: Decentralized finance, blockchain technology, financial intermediation, system risk
Classification-JEL: G12, G15, F38
Handle: RePEc:bis:biswps:1061