DECENTRALIZED FINANCE: HERE ARE FEW THINGS YOU WOULD WANT YOURSELF TO KNOW ABOUT!

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Many types of financial service providers are incorporating new technologies that could decentralize the financial system. The decentralization of financial services refers to the elimination — or reduction in the role — of one or more intermediaries or centralized processes that have traditionally been involved in the provision of financial services. In some instances, it refers to the decentralization of risk-taking away from traditional intermediaries. This already takes place through capital markets but could be extended more widely, including the provision of credit and insurance. In other cases, it can also involve the decentralization of decision-making and record-keeping. It is impossible to predict with certainty the future scope or degree of decentralisation in the financial system. Applications that decentralize along all three of these dimensions (risk-taking, decision-making, and record-keeping) have yet to achieve an economically significant scale. That said, technologies that facilitate decentralization along one or two of these dimensions may, over time, have a noticeable economic impact. There are already examples emerging of decentralization in payments and settlement, capital markets, trade finance, and lending. The application of decentralized financial technologies — and the more decentralized financial system to which they may give rise — could benefit financial stability. It may also lead to greater competition and diversity in the financial system and reduce the systemic importance of some existing entities.1 At the same time, the use of decentralized technologies may entail risks to financial stability.2 These include the emergence of concentrations in the ownership and operation of key infrastructure and technology, as well as a possible greater degree of procyclicality in decentralized risk-taking. New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system. Recovery and resolution of decentralized structures may be more difficult. These issues may pose challenges for financial regulatory and supervisory frameworks, particularly those that currently focus on centralized financial institutions. A more decentralized financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities. These concerns could continue to be the subject of further consideration by authorities. Regulators may also wish to engage in further dialogue with a wider group of stakeholders, including in the technology sector, that have had limited interaction with financial regulators to date. This should help avoid the emergence of unforeseen complications in the design of decentralized financial technologies at a later stage

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