Decentralized Finance and Centralized Finance

Overview
Decentralized finance (DeFi) is seen as complementary to centralized financial sectors but not as a replacement, according to Federal Reserve Governor Christopher Waller.

Efficiency Gains
Waller emphasized that technological progress could drive efficiency gains in finance. During the 19th Annual Vienna Macroeconomics Workshop, he stated, “DeFi won't replace centralized finance, in part because intermediation is still needed.”

Complementary Nature
He noted that while some DeFi services are unique, the innovations from DeFi can enhance centralized finance’s value. Waller believes that advancements in DeFi could lead to improvements in financial intermediation.

Background of Christopher Waller
Christopher Waller, a Federal Reserve Board member since 2020, was nominated by former President Trump. He has previously likened cryptocurrency to baseball cards and favors innovation in stablecoins over central bank digital currencies (CBDCs).

Technological Innovation
On Friday, Waller discussed distributed ledger technology, which he suggested could improve recordkeeping in continuous trading environments. He highlighted that some institutions are experimenting with it for repo trading.

Tokenization
Waller pointed out the need to tokenize traditional assets to facilitate transactions using distributed ledgers such as blockchain, which could lead to faster asset transfers and enable smart contracts.

Risks and Regulation
However, he acknowledged that DeFi has risks, particularly regarding bad actors, indicating a need for regulatory oversight. U.S. lawmakers have yet to include DeFi regulation in recent bills, instead directing agencies to study the matter.

SEC and Regulations
Waller also referred to the SEC's proposal to broaden the definition of exchanges to include decentralized exchanges, which could require registration as alternative trading systems.

Importance of Regulations
He argued that just as centralized finance requires banks to know their clients, similar regulations may be necessary for new technologies.

Stablecoins
Waller underscored the importance of stablecoins in DeFi but also warned of their risks. He highlighted historical instances of synthetic dollars being vulnerable to runs, suggesting that with appropriate regulations, stablecoins can provide benefits in payments and serve as secure assets on various trading platforms.