On Defi and On-Chain CeFi: How (Not) to Regulate Decentralized Finance

45 Pages Posted: 28 Apr 2023

See all articles by Katrin Schuler

Katrin Schuler

University of Basel - Center for Innovative Finance

Ann Sofie Cloots

University of Cambridge, Faculty of Law

Fabian Schär

Center for Innovative Finance, University of Basel; University of Basel - Economics Department

Date Written: April 18, 2023

Abstract

This paper proposes a framework to assess the factual decentralization of blockchain-based financial infrastructure, commonly referred to as Decentralized Finance (DeFi). It discusses various centralization vectors along the DeFi architecture layers from a technological and legal point of view. Distinguishing between endogenous and inherited centralization, we demonstrate the importance of decentralization assessments for regulators. First, centralization vectors are a strong indication that a DeFi project may have (some) custodial properties warranting regulation. Second, centralization vectors reveal the avenues of control in projects, pointing out appropriate regulatory hooks. The paper serves as an interdisciplinary introduction that analyzes blockchain-based financial infrastructure and provides policymakers and regulators with a tool to identify the differences between truly independent, neutral infrastructure and fake decentralization. We conclude that the former may have very beneficial properties and can contribute towards a more open and transparent financial system, while the latter is a blockchain-based form of financial intermediation and should be regulated as such.

Keywords: Blockchain, Decentralized Finance, Regulation, Smart Contracts, Tokenization

JEL Classification: G15, G18, G28, K20

Suggested Citation

Schuler, Katrin and Cloots, Ann Sofie and Schär, Fabian, On Defi and On-Chain CeFi: How (Not) to Regulate Decentralized Finance (April 18, 2023). Available at SSRN: https://ssrn.com/abstract=4422473 or http://dx.doi.org/10.2139/ssrn.4422473

Katrin Schuler (Contact Author)

University of Basel - Center for Innovative Finance ( email )

Basel
Switzerland

Ann Sofie Cloots

University of Cambridge, Faculty of Law ( email )

10 West Road
Cambridge, CB3 9DZ
United Kingdom

Fabian Schär

Center for Innovative Finance, University of Basel ( email )

Basel, 4001
Switzerland

HOME PAGE: http://cif.unibas.ch

University of Basel - Economics Department ( email )

Petersgraben 51
Basel, CH-4003
Switzerland

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