Decentralised finance: Bank of Russia’s information and analytical report
The report looks at the principles of decentralised finance (DeFi) organisation, analysing its potential and risks for users. It continues the series of papers on modern digital technologies in the financial market.
DeFi is a system that makes it possible to provide and receive the equivalent of standard financial services (lending, insurance, and asset management), as well as to perform other transactions with cryptoassets operating on the basis of distributed ledger technology (blockchain). Transactions are performed automatically through smart contracts, while users control their assets themselves. DeFi operates anonymously across national borders and is highly composable allowing its users to combine various services and products just like Lego.
This is a new model of financial infrastructure without the usual financial intermediaries able to perform transactions with different cryptoassets, such as digital financial assets, backed stablecoins, and not cryptocurrencies alone. Potentially, DeFi can operate with digital currencies of central banks and tokenised non-cash currencies. Despite the fact that DeFi is not widely used in the global market yet, the system has created an image of financial world of another type living by its own rules and having its own infrastructure.
In case of significant expansion of DeFi, along with specific risks, systemic risks inherent in the traditional finance sector may also arise.
There is currently no consensus globally on what regulatory approaches and scenarios are optimal to ensure the balance of innovative development of DeFi and risk management, and which authority should regulate it. The problem of regulatory arbitrage of DeFi relative to the existing finance system is also the subject of study.
The Bank of Russia will continue to explore the features of new innovative systems, assess international practices and formulate its approach to their regulation.