Federal Reserve researchers predict two adoption scenarios for crypto and defi in new report

Federal Reserve researchers predict two adoption scenarios for crypto and defi in new report

New research from the US Federal Reserve offers two scenarios that could lead to the widespread use of crypto and decentralized finance (DeFi).

In a new report, the Fed says there are two paths forward – one where blockchain finance is intertwined with traditional finance, and one where they are separate but parallel.

“Broadly speaking, there are two conceptual scenarios (not necessarily mutually exclusive) that could lead to a breakthrough where blockchain finance could become an important provider of the services currently provided by financial markets and off-chain institutions.

In one scenario, these blockchain services gain greater interoperability with the existing payment and financial system (for example, they evolve to connect real-world assets to public blockchains).

Another scenario could see cryptoassets develop into a separate, parallel financial system that provides services for the real economy.”

According to the Fed study, financial stability risks loom in both scenarios as both the decentralized finance and centralized finance (CeFi) subsectors are largely unregulated.

“In either scenario, both CeFi and DeFi could pose financial stability risks exacerbated by the fact that both are currently largely outside the regulatory perimeter.

Correcting many of these potential weaknesses is conceptually relatively simple for a large class of CeFi providers, but may prove more challenging for DeFi providers.

The existence of a centralized intermediary in the case of CeFi provides an entity that is potentially subject to regulation and with which regulators may be able to discuss their concerns.

However, DeFi products and services may not be so easily brought into the current supervisory and regulatory ambit.”

The Fed also looks at the wild price swings in crypto and suggests two ways to improve the stability of the digital asset markets.

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“An additional way to reduce volatility in cryptocurrency prices could be for various aspects of DeFi to be more closely integrated with the existing financial system.

This approach can take the form of [2021] proposal that stablecoins be issued only by insured depositories backed by deposit insurance and central bank liquidity facilities (such as the Federal Reserve’s discount window).

Finally, the creation of a central bank digital currency (CBDC) that becomes available on public, permissionless blockchains like Ethereum could also help reduce volatility.”

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