Embedded Supervision: How to Build Regulation into Decentralised Finance

Raphael Auer

No 9771, CESifo Working Paper Series from CESifo

Abstract: The emergence of so-called “decentralised finance” (DeFi) and a shadow financial system of cryptocurrency exchanges and stablecoin issuers raises the challenge of how to apply technology-neutral regulation so that similar risks are subject to the same rules. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in decentralised markets to be automatically monitored by reading the market’s ledger. This reduces the need for firms to actively collect, verify and deliver data. The paper explores the conditions under which distributed ledger data may be used to monitor compliance. To this end, a decentralised market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.

Keywords: decentralised finance; DeFi; tokenisation; asset-backed tokens; stablecoins; crypto-assets; cryptocurrencies; CBDC; regtech; suptech; regulation; supervision; Basel III; proportionality; blockchain; distributed ledger technology; digital currencies; proof (search for similar items in EconPapers)
JEL-codes: D20 D40 E42 E51 F31 G12 G18 G28 G32 G38 K22 K24 L10 L50 M40 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-law, nep-mac, nep-pay and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9771

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