Cryptocurrencies and Decentralized Finance (DeFi)

Igor Makarov and Antoinette Schoar
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Igor Makarov: London School of Economics
Antoinette Schoar: MIT Sloan School of Management

Brookings Papers on Economic Activity, 2022, vol. 53, issue 1 (Spring), 141-215

Abstract: The paper provides an overview of cryptocurrencies and decentralized finance (DeFi). The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance and anti-money laundering laws and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.

Keywords: cryptocurrencies; macroprudential policy; central banks; financial institutions; blockchain (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bin:bpeajo:v:53:y:2022:i:2022-01:p:141-215

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