DeFi – CeFi Convergence & ‘Explosive’ Growth Are Coming

Decentralized finance (DeFi) and centralized finance (CeFi) are heading towards convergence as we are entering a period of rapid development for DeFi applications worldwide, according to the participants of a panel discussion at this year’s BIS Innovation Summit, an event hosted by the Bank for International Settlements (BIS).

The panel, entitled ‘CeFi to DeFi: can global finance be de/re-constructed?’, featured a mix of private and public sector participants who voiced their ideas and concerns related to how the opportunities and risks inherent to DeFi could transform the global financial landscape.

David Puth, CEO at Centre, the company that manages USD Coin (USDC), said that “the promise of what can happen in decentralized finance” is increasingly appreciated by the world of legacy finance.

The world is heading toward a “convergence” of centralized finance and DeFi, according to the CEO, who said “there’s an explosive period of growth ahead of us”.

Asked about the potential coexistence of central bank digital currencies (CBDCs) and stablecoins, Puth argued that, while “every central bank is going to move at its own pace accordingly,” he was confident that “stablecoins and CBDCs are going to be peacefully co-existing for an indefinite period of time.”

Joseph Lubin, Founder and CEO of blockchain company ConsenSys and Co-founder of Ethereum (ETH), stated that “the trust characteristic of blockchain comes from maximum decentralization” and “technologists and regulators have the same overarching goal: to build better systems that serve more people.”

“In these early stages of development of technology there are many sharp edges,” Lubin said, pointing to some of the areas which could be transformed through DeFi.

He further opined that microlending businesses could be built “more effectively” with the use of DeFi, but that it would take time, adding:

“Payments will be a massive innovation. Self-custody wallets already are an innovation. The way we trade tokens […] is going to become more fair, in my opinion.”

Presenting a regulator’s point of view, Hester Peirce, Commissioner at the U.S. Securities and Exchange Commission (SEC), noted that “regulators are used to dealing with a centralized counterparty to which we can go.”

“There are ways to deal with that risk. You can set up a system to mutualize losses in such a scenario [in which you deal with DeFi entities],” she argued. But another risk in her opinion is that people often don’t think about regulation until a problem arises, and “when there is a problem, they really need a regulator,” Peirce said.

While many things in DeFi are out of the SEC’s purview, some are building “things that mimic securities […] and that would fall within our purview,” said Peirce, admitting that the agency has been “slow to give guidance, so people did things that potentially implicated securities.”

Sheila Warren, Head of Blockchain and Data Policy and Member of the Executive Committee at the World Economic Forum (WEF), stated that she believed “DeFi promotes financial inclusion” but that “many people use that […] for claiming inclusion when there really is not a lot of it”.

Barriers to DeFi’s further proliferation included lack of digital literacy and wealth in many parts of the world, paired with a lack of infrastructure and Internet access. These represented issues which DeFi itself could not solve, according to Warren.

Pointing to a “danger of regulatory fragmentation,” Warren said she would encourage international coordination of respective countries’ regulation of DeFi.

“We can create learning communities which can tell each other about where the pitfalls are,” Warren said.

For its part, the WEF was planning to release this spring a new paper, entitled DeFi beyond the hype paper, and a toolkit for DeFi users created in cooperation with the University of Pennsylvania, she said.

“This is a shift to be embraced, and not feared,” Warren argued, adding that industry players and regulators needed to work together to ensure DeFi’s potential is used to the users’ benefit.

Headquartered in Basel, Switzerland, the BIS says it is jointly owned by the world’s 62 central banks, representing countries that together represent some 95% of the global gross domestic product (GDP).

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