According to a member of the Bank of England’s financial-stability committee, the necessity to react to unforeseen events and the unfair advantage enjoyed by insiders prevent finance from ever becoming genuinely decentralised.
The 2008 financial crisis resulted in the failure of Bear Stearns and Lehman Brothers, and Carolyn Wilkins is the most recent regulator to question governance mechanisms in decentralised finance (DeFi). She notes that these failures were caused by poor decision-making.
Apart from being a member of the financial policy committee (FPC) of the Bank of England, Wilkins is a research scholar at Princeton University (FPC). After the crisis, the FPC was established to identify possible threats to the entire financial system.
The reality is intrinsically uncertain, as per Wilkins. There will never be a set of smart contracts suitable for every circumstance, and when the unexpected occurs, centralised decision-making will always be required.
Wilkins noted that DeFi structures can concentrate knowledge and power in the hands of those with the most tokens or coding expertise.
Regulators, however, accustomed to imposing laws on clearly defined, centralised businesses like banks, are at a loss as to how blockchain and other distributed technology might be utilised for financial services like lending.
DeFi was referred to as an “illusion” by Bank for International Settlements analysts in 2021. Despite asking for a “comprehensive” crypto rulebook in a report released on October 11, standard-setters at the Financial Stability Board generally avoided the subject.