"Fed Board Member Discusses Blockchain and U.S. Financial Development, Saying 'DeFi Can Improve Financial Efficiency'"

According to a report, Federal Reserve Governor Christopher Waller discussed the impact of blockchain, stablecoins, and DeFi on the U.S. financial system at the 19th annual Vienna Macro Economics Conference on Friday. Christopher Waller is one of the seven members of the Federal Reserve Board of Governors, nominated by Donald Trump in 2020. He acknowledged that technological advancements can enhance financial efficiency, but DeFi will not replace centralized finance, in part because DeFi still requires fiat currency as an intermediary.

DeFi can improve financial efficiency but cannot replace centralized financial systems

"While some services offered by DeFi are not provided by centralized finance, the technological innovations brought by DeFi are largely complementary to centralized finance," said Christopher Waller, adding, "They have the potential to enhance centralized finance, thereby increasing the important values provided by financial intermediaries and centralized financial markets."

Although the Federal Reserve Board member acknowledges the development of DeFi, his concept of DeFi still follows centralized finance rather than being an independent system. This idea can be confirmed from his statement where he said, "DeFi can complement the centralized finance sector, but cannot replace it."

Federal Reserve Board member cites free-market principles, opposes issuing CBDC

Christopher Waller also discussed stablecoins in his speech, calling them an important component of DeFi but warning of risks associated with them.

"History is full of cases where synthetic dollars faced a run. So stablecoins face the same problems as any dollar substitute," said Christopher Waller. "If appropriate measures can be put in place to minimize operational risks and mitigate other risks such as illicit financial use, stablecoins could benefit in payments and serve as secure assets on various new trading platforms."

Previously, Christopher Walker expressed doubt about whether the Federal Reserve's CBDC could address any significant issues facing the U.S. payment system. The Federal Reserve Board member leans towards free-market principles on this issue, believing that allowing private institutions to issue stablecoins is preferable to the government issuing CBDC.

"Governments should only compete with the private sector when necessary to address market failures. This fundamental principle has served the United States well since its founding, and I don't think CBDCs should be an exception," he said, laying the foundation for his thinking on stablecoins. Continuing his preference for stablecoins over CBDCs, he believes stablecoins strengthen the use of the dollar rather than weaken it.

Blockchain technology can be practically applied in financial transactions requiring 24/7 trading

He also mentioned that blockchain technology may be a more efficient and faster way to record transactions in a 24/7 trading world. Christopher Walker cited examples of some financial institutions experimenting with using blockchain technology for repurchase transactions.

"However, before these blockchain technologies can be used for transactions involving traditional assets such as debt, equity, and real estate, these assets must be tokenized. Tokenizing assets and using distributed ledgers like blockchain can expedite asset transfers and take actions," said Christopher Walker.

Permissionless principles conflict with preventing crime, how will the future development of DeFi balance this?

Lastly, discussing regulation, Christopher Waller believes that DeFi may also have its own risks, such as providing funding to bad actors. He also mentioned the necessity of regulation, as U.S. lawmakers have not yet addressed regulation of DeFi in recent legislation.

In legislation passed by the House of Representatives last year, it instructed the U.S. Treasury Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commission to study DeFi. The bill, led by Republicans, grants the CFTC new jurisdiction over "digital commodities."

"In centralized finance, there are requirements for banks to know who their customers are," said Christopher Walker, questioning whether these new technologies require similar rules and regulations. Although such regulations completely contradict the well-known concept of permissionless open networks.