FSB published a report that examines the financial stability, regulatory, and governance implications of the use of decentralized financial technologies such as those involving distributed ledgers and online peer-to-peer, or user-matching, platforms. The report suggests that the use of decentralized technologies may entail risks to financial stability. 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. Additionally, recovery and resolution of decentralized structures may be more difficult.
The report describes the decentralization of financial services as 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 can refer to the decentralization of risk-taking away from traditional intermediaries. The report, which has been delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on June 08-09, focuses on technologies that may reduce or eliminate the need for intermediaries or centralized processes that have traditionally been involved in the provision of financial services. Such decentralization generally takes one of three broad forms—the decentralization of decision-making, risk-taking, or record-keeping. There are already examples emerging of decentralization in payments and settlement, capital markets, trade finance, and lending.
Significant use of decentralized financial technologies may have implications for the effectiveness and enforceability of current regulatory frameworks, particularly where the execution of supervisory and oversight mandates focuses on the presence of centralized decision-making entities (for example, financial intermediaries). 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 issues could continue to be the subject of further consideration by authorities.
As part of the G20 discussion, authorities may wish to consider the implications of decentralized financial technologies for proportional and consistent application of regulation of decentralized financial technologies, financial supervision, and financial regulation and regulatory approaches. Regulators may also wish to engage in further dialog with a wider group of stakeholders, including those 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.
Keywords: International, Banking, Insurance, Securities, Decentralized Financial Technologies, Proportionalities, DLT, Fintech, Financial Stability, G20, FSB