A new study from the Federal Reserve of the United States outlines two scenarios that may lead to the widespread adoption of cryptocurrencies and decentralized finance (DeFi).
In recent research, the Fed identifies two possible futures: one in which blockchain finance and conventional finance are intertwined, and one in which they are distinct but parallel.
When describing the potential for blockchain finance to become a significant supplier of the services now offered by off-chain financial markets and institutions, the authors state, “Broadly speaking, there are two basic possibilities that may lead to a breakthrough.”
One potential outcome is that blockchain services become more compatible with the current monetary and payment infrastructure.
In a second possibility, crypto assets may evolve into a parallel financial system that delivers services to the actual economy.
Due to the lack of oversight in both the decentralized finance and centralized finance (CeFi) sectors, the Fed report warns that financial stability concerns exist in both scenarios.
CeFi and DeFi may represent dangers to financial stability that are magnified by the fact that they are now located mostly outside the financial regulatory framework.
Many of these potential flaws are theoretically simple to remedy for a wide class of CeFi providers, but DeFi providers may find it more difficult.
CeFi’s centralized intermediary creates a possible target for regulation and a point of contact for supervisory bodies to express their concerns.
However, it may be difficult to include DeFi goods and services inside the present regulatory framework. The Fed also examines the huge price fluctuations in cryptocurrencies and offers two approaches to stabilize the markets for digital assets.