Decentralized Finance (DeFi)

IIEL Issue Brief 02/2020

European Banking Institute Working Paper Series 59/2020

University of Hong Kong Faculty of Law Research Paper No. 2020/010

University of Luxembourg Faculty of Law, Economics & Finance WPS

Journal of Financial Regulation - forthcoming

56 Pages Posted: 3 Mar 2020 Last revised: 25 Sep 2020

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC); European Banking Institute

Douglas W. Arner

The University of Hong Kong - Faculty of Law

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law

Date Written: March 2020

Abstract

DeFi – ‘Decentralized Finance’ – has joined FinTech, RegTech, cryptocurrencies and digital assets as one of the most discussed emerging technological evolutions in global finance. Yet little is really understood about its meaning, legal implications and policy consequences. This article introduces DeFi, puts DeFi in the context of the traditional financial economy, connects DeFi to Open Banking and ends with some policy considerations. We suggest that decentralization has the potential to undermine traditional forms of accountability and erode the effectiveness of traditional financial regulation and enforcement. At the same time, we find that where parts of the financial services value chain are decentralized, there will be a reconcentration in a different (but possibly less regulated, less visible and less transparent) part of the value chain. DeFi regulation could and should focus on this reconcentrated portion of the value chain to ensure effective oversight and risk control. Rather than eliminating the need for regulation, in fact DeFi requires regulation in order to achieve its core objective of decentralization: decentralization arguably requires centralization of some form in order to be successful in most cases. Furthermore, DeFi potentially offers an opportunity for the development of an entirely new way to design regulation – the ideas of 'embedded supervision' and ‘embedded regulation’ – building regulatory approaches into the design of DeFi, potentially decentralizing both finance and its regulation in the ultimate expression of RegTech.

Keywords: DeFi, Decentralized Finance, FinTech, Blockchain, Distributed Ledger, Financial Regulation, Supervision, RegTech

Suggested Citation

Zetzsche, Dirk Andreas and Arner, Douglas W. and Buckley, Ross P., Decentralized Finance (DeFi) (March 2020). IIEL Issue Brief 02/2020, European Banking Institute Working Paper Series 59/2020, University of Hong Kong Faculty of Law Research Paper No. 2020/010, University of Luxembourg Faculty of Law, Economics & Finance WPS, Journal of Financial Regulation - forthcoming, Available at SSRN: https://ssrn.com/abstract=3539194 or http://dx.doi.org/10.2139/ssrn.3539194

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

Heinrich Heine University Dusseldorf - Center for Business & Corporate Law (CBC) ( email )

Universitaetsstr. 1
D-40225 Düsseldorf
Germany
+49 211 81 15084 (Phone)
+49 211 81 11427 (Fax)

European Banking Institute ( email )

Frankfurt
Germany

Douglas W. Arner

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01237

Ross P. Buckley

University of New South Wales (UNSW) - Faculty of Law ( email )

Sydney, New South Wales 2052
Australia

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