Federal Reserve Governor Christopher Waller believes DeFi is more likely to work alongside traditional finance rather than replacing it entirely.
Speaking at the Vienna Macroeconomics Workshop on October 18, Waller dove into the ongoing debate around DeFi’s role in the financial system, acknowledging its innovations while emphasizing the enduring value of centralized finance.
A complementary system
According to Waller, intermediaries, or “middlemen,” remain essential to managing the complexity of financial transactions. He emphasized that the benefits of centuries-old centralized systems, such as reducing transaction costs and ensuring trust, still have value in today’s evolving financial landscape.
He declared:
“DeFi has brought new technologies that can improve efficiency, but it cannot replace the complex and reliable systems that centralized finance has developed over centuries.”
Waller acknowledged that DeFi introduces technological advancements that could streamline and reduce the cost of financial activities without the need for intermediaries. He cautioned, however, against the idea of a completely decentralized financial system, emphasizing that intermediaries still serve a valuable function for most individuals. The Fed Governor said:
“The idea that finance can be completely decentralized is unrealistic.”
Waller added that DeFi platforms may reduce the need for some intermediaries, but the need for trust in financial systems remains paramount. He highlighted how crypto exchanges often reintroduce the same middleman role that DeFi aims to eliminate.
Benefits and Challenges
One of the key benefits Waller discussed was the potential for distributed ledger technology (DLT), tokenization and smart contracts to improve the speed and accuracy of financial transactions.
He noted that these technologies could be particularly useful for tasks such as recordkeeping in a 24/7 business environment. For example, smart contracts can automatically execute complex transactions by ensuring that all conditions are met, potentially reducing settlement risks typically associated with manual processes.
Waller highlighted that several financial institutions are already experimenting with DLT to enhance traditional trading methods, such as the use of blockchain in repo markets. He added:
“The bottom line is that things like DLT, tokenization and smart contracts are just trading technologies that can be used in challenge or also to improve the efficiency of centralized finance. This is why I consider them complementary.
However, Waller made it clear that there are challenges to making DeFi effective, including regulatory oversight and security. He raised concerns about the risks posed by decentralized systems, including the potential for illicit financing and the lack of established trust mechanisms that are fundamental to centralized financing.
According to Waller:
“Centralized finance relies on regulatory frameworks to ensure financial stability and prevent illegal activity, and similar safeguards may be needed in the DeFi space.”
