The Bank for International Settlements (BIS), a finance organization comprised of several central banks, has stated that while the objective of decentralized finance is to move control of financial tools away from current financial institutions, it just provides an ‘illusion’ of doing so. It claims that governance tokens are subject to some form of centralization, which extends to consensus chains that can be proved-of-stake (PoS).
Bank for International Settlements Criticizes Decentralized Finance’s Raison D’etre
One group of central bankers, the Bank for International Settlements has discussed decentralized applications of finance and their impact on capital market. The bank has criticized cryptocurrencies before, and now, in its latest quarterly review, the organization issued a report called “Defi risks and the decentralization illusion,” where it questions the ethos of the sector, and declares there is no real decentralization in it.
Definitive Finance Initiative (Defi) is currently implemented in an environment that can be self-contained. According to this report, it has very little or no impact on financial freedom. This is what the report emphasizes:
(defi) currently has limited real-economy use and supports arbitrage and speculation across multiple cryptoassets. The potential for disruption in the wider financial system by defi seems small for the time being, given its self-contained nature.
Decentralization Is an ‘Illusion’
BIS is also critical of the decentralization that defi claims, compared with the traditional financial marketplace. This decentralization, according to BIS, is a figment of reality and carries centralization risk.
All deFi platforms have an element of centralization, which typically revolves around holders of “governance tokens” (often platform developers) who vote on proposals, not unlike corporate shareholders.
This governance aspect also makes it possible for defi protocol to be legal entities. This is because most chains hosting decentralized financial protocols use proof-of-stake consensus algorithms. It also results in some centralization by large token holders.
The review also found that traditional finance is creating more links with new protocols to help prevent centralization. The potential for spillover from traditional financial services and bridging businesses to defi could impact these protocols’ operations in a significant way.
Let us know your thoughts about the Bank for International Settlements’ latest report and its conclusions. Comment below.
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