BIS Director: DeFi has the same vulnerabilities as traditional services.
In the manager’s opinion, digital money must be governed by identification and not anonymity.
The violation of privacy, the concentration of power and monetary hegemony are part of the future that the president of the Bank for International Settlements (BIS) predicts if stable currencies grow to the point of dominating the world economy. .
so what He suggested Agustín Carstens, who heads the international institution, during his participation in the forum «Data, Digitization, the New Finance and Digital Currencies of Central Banks”. The conference was organized by the Goethe University Institute for Law and Finance (ILF).
for the banker, that defends centralized finance (CeFi) at all costsHowever, if a large tech company developing stablecoins, like the ones behind Tether (USDT) and USD Coin (USDC), takes over global economic control, others are going to want to follow suit. This, he points out, would bring monetary dominance by the «big tech«.
“We could end up with a few dominant “walled gardens” competing with each other and with national currencies, thus fragmenting national and global monetary systems. As early profits fade, familiar market concentration problems will quickly appear. Furthermore, the same economic forces that foster inclusion can also cause discrimination, privacy violations, and market concentration.”
Agustín Carstens, president of the Bank for International Settlements (BIS).
One reason for this, he explained, is personal data, which is held by third parties. For him, the information of a person who has stablecoins can glimpse that of others. In addition, it is possible that whoever has the data, end up knowing more about user behavior than they do. “Armed with exclusive access to data, big tech companies can quickly scale and dominate markets,” he warned.
A call for regulation
Carsten accommodated the petition for regulations for stablecoins. He explained that digital money “should not be based on anonymity but on identification and trust,” so they must comply “with financial regulation that is designed to keep the system safe.”
“Wherever private stablecoins are issued, they must be properly regulated to deal with the risks they pose, such as runs, payment system risk, and concentration of economic power,” he explained.
And he also urged stablecoin companies and initiatives not to fear the regulators, but to “work with them to make their products more robust and sustainable”.
This, to make way for central bank digital currencies (CBDC), which, in addition to being fiat money, embody institutions that “do not have profit, but service to society.”
“They have no commercial interest in personal data. They act as operators, overseers and catalysts in payment markets, and regulate and supervise private providers in the public interest,” said Carsten.
But, in fact, a CBDC is known to place all user information, including personal data and financial movements, in the hands of the State and according to the interests of a government.
Centralized and vulnerable decentralization
Carsten talked about decentralized finance (DeFi). He admits that his precept is a «noble goal», since, in practical terms, governance is better when power is distributed, controlled and balanced. A principle, he points out, materialized in free and competitive markets.
“But this principle is not what DeFi applications offer,” he says. In his opinion, “there is a great abyss between vision and reality.” He argues that, right now, the decentralized space has been used, first, for speculative activities.
“Users invest, borrow and trade crypto assets in a largely unregulated environment. The absence of controls such as know-your-customer [KYC, por sus siglas en inglés] and anti-money laundering laws could well be a major factor in the growth of DeFi,” he added.
Furthermore, he said, a financial system parallel to the traditional one is emerging, developing on two fronts: smart contracts and, again, stablecoins.
About the first ones, which run on blockchains, he lashed out: “These contracts will never be smart enough to cover all possible eventualities and, therefore, someone must write and update the code and run the platform.”
That is why – the specialist suggests – “there is a lot of centralization in DeFi”, something that has been discussed in recent investigations and that Carsten has already stated, as CriptoNoticias has collected.
Regarding stable currencies, the banker concluded by pointing out that these “grease the wheels of DeFi”, but also end up being part of centralization: as their objective is to maintain parity with the dollar or euro, “they allow transfers between platforms and form a bridge to the traditional financial system.
Same vulnerabilities as traditional finance
Carsten continued his speech against DeFi. For him, these are subject to the same vulnerabilities present in traditional financial services. These are high leverage, liquidity mismatches, and connections to the formal financial system.
These factors “mean that vulnerabilities in DeFi could undermine the stability of the financial system in general.” It appears that, as occurs with market mutual funds, with decentralized finance there is a risk that, during a shock economic, stablecoins suffer bull runs.
“Therefore, there is a risk that this ‘magic’, once launched, will get out of control. As in Goethe’s “The Sorcerer’s Apprentice”, DeFi applications could take on a life of their own, interacting with each other in unpredictable ways. When a lockdown occurs and money is lost, users will inevitably turn to a trusted and experienced party, the public authorities, to tame the unleashed spirits and restore order.”
Agustín Carsten, president of the Bank for International Settlements (BIS).
“CBDC do not need to borrow their credibility”
According to the representative of the Bank for International Settlements, a CBDC does not have to borrow your credibility, because by being issued directly by a central bank, “they inherit the trust that the public already places in their currency.”
“Therefore, they can serve as a strong foundation for future innovation. Central banks can provide this foundation on a national level, but also on a global scale,” he explained, later adding: “Imagine a global network of CBDCs. Different central banks would design and issue a new form of public money, tailored to the preferences of their economies and societies.
But a CBDC, in practical terms, is the same fiat and centralized money. It is public, certainly, but inflationary, unlimited and without support, beyond what a central bank gives it.
That network, as he explained, would be decentralized, in the sense that no single central bank will be able to cover all the different currencies in the system on its own. Coincidentally, it is one of the definitions of the Bitcoin ecosystem, but distorted for the purposes of state control of money.
And he concluded: “Central banks, as validation nodes, are not there to make money by extracting coins. Instead, they perform this function as part of their public service mandate. (…) Central banks and public authorities continue to be the glue that holds the monetary and financial system together. Private sector services and innovation are essential and should thrive on this foundation. But trust can never be outsourced or automated.”
In the end, Carstens defends his niche and predisposes the central banks and financial authorities of the countries as the “glue” that keeps the traditional financial system running, criticized for others and truly controlled by entities that, in practical and theoretical terms, they distort the economic freedom that Bitcoin can offer.