Finance Can Never be Fully Decentralized, Says UK Central Banker
Finance can never become truly decentralized, a member of the Bank of England’s financial-stability committee has said, citing an unfair advantage for insiders and the need to respond to unforeseen events.
Carolyn Wilkins is the latest in a line of regulators to cast doubt on governance structures within decentralized finance (DeFi) – noting that poor decision-making led to the collapse of Bear Sterns and Lehman Brothers in the 2008 financial crisis.
“I think there are hard limits to how decentralized a system can become in practice,” said Wilkins, a research scholar at Princeton University who sits on the Bank of England’s Financial Policy Committee (FPC), in a speech published on Wednesday. The FPC was set up after the crisis to spot potential risks to the overall financial system.
“We live in an inherently uncertain world,” said Wilkins, previously at the Canadian central bank. “There can never be a set of smart contracts for every situation, and centralized decision making will always be needed when the unexpected happens.”
The invocation of emergency powers at protocols such as Solend has proved controversial, and Wilkins noted that DeFi structures can concentrate both knowledge and power in the hands of those with the most tokens or coding expertise.
But the possibility of using blockchain and other distributed technology for financial services such as lending has posed a quandary for regulators used to imposing rules on well-defined, centralized entities such as banks.
Late last year, researchers at the Bank for International Settlements called DeFi an “illusion.” Standard setters at the Financial Stability Board largely steered clear of the topic in an Oct. 11 report, despite calling for a “comprehensive” crypto rulebook.