DeFi Should Complement Traditional Finance, Not Replace it

Federal Reserve Board member Christopher Waller shared his perspective on decentralized finance (DeFi) during the Vienna Macroeconomics Seminar on October 18, suggesting that DeFi is more likely to complement traditional finance than replace it.

While recognizing DeFi’s innovative potential, Waller emphasized that established financial systems still play a vital role in handling complex transactions.

He argued that intermediaries remain essential in the financial landscape, citing the long-standing benefits of traditional systems, such as lower transaction costs and stronger trust.

Although DeFi can streamline financial processes and cut costs by reducing the need for intermediaries, Waller questioned the feasibility of a fully decentralized system. He suggested that for most people, intermediaries still help maintain confidence in financial transactions.

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Waller also noted that despite DeFi’s aim to eliminate intermediaries, trust remains crucial, as seen in the role of cryptocurrency exchanges, which often reintroduce some intermediary functions.

He highlighted the potential advantages of technologies like distributed ledger technology, tokenization, and smart contracts in accelerating and improving the accuracy of transactions, especially in a 24/7 trading environment.

He concluded by pointing out that centralized finance benefits from regulatory frameworks that provide stability and prevent illicit activities, and suggested that similar protections might be necessary for the DeFi space.

Alexander Zdravkov