Advocates of a decentralized future of money based on distributed ledger technology are chasing an illusion, according to Bank of International Settlements General Manager Agustin Carstens.

Agustin Carstens, chief executive officer of the Bank for International Settlements, speaks during the Institute of International Finance (IIF) Spring Membership Meeting in Tokyo, Japan, on Thursday, June 6, 2019. Bank of Japan Governor Haruhiko Kuroda says the most important role of financial regulation and supervision is to address market failures.
Agustin Carstens, chief executive officer of the Bank for International Settlements (Bloomberg Mercury)

Their vision, which is to “democratize finance” by cutting out big banks and other middlemen, is “not what decentralized finance applications are delivering,” he said on Tuesday addressing an event in Frankfurt.

“There is a large gulf between vision and reality,” Carstens argued.

DLT technology, which underpins cryptocurrencies such as Bitcoin and is being experimented with in large parts of the financial system, in principle allows anyone to be a validator in a shared network. Carstens — who’s long been a skeptic of Bitcoin — countered that “in practice, there is a lot of centralization in decentralized finance.”

That’s because self-executing protocols, or “smart contracts,” can’t cover every possible scenario, and rely on individuals to write and update code. In addition, certain features of DeFi blockchains favor the concentration of decision making power in the hands of large coin-holders. For example, transaction validators need to receive enough compensation to give them “the right incentive” to participate, he said.

“Decentralization can be a noble goal. In many applications, governance improves when power is genuinely dispersed, with appropriate checks and balances,” Carstens said. “To date, the DeFi space has been used primarily for speculative activities.”

— By Carolynn Look (Bloomberg Mercury)

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