Bank for International Settlements States True Decentralized Finance Is an ‘Illusion’

The Bank for International Settlements (BIS), a finance organization comprised of several central banks, has stated that while the objective of decentralized finance is to move control of financial tools away from current financial institutions, it just provides an ‘illusion’ of doing so. The organization argues that there is some kind of centralization around governance tokens and that this extends to proof-of-stake (PoS) consensus chains.

The Bank for International Settlements (BIS), a group of central banks, has addressed the rise of decentralized finance applications and their current impact on capital markets. The bank has criticized cryptocurrencies before, and now, in its latest quarterly review, the organization issued a report called “Defi risks and the decentralization illusion,” where it questions the ethos of the sector, and declares there is no real decentralization in it.

The report states that the current implementation of defi has little to no influence in bringing financial freedom to the masses, as it is a self-contained environment. The report stresses:

At present, (defi) has few real-economy uses and, for the most part, supports speculation and arbitrage across multiple cryptoassets. Given this self-contained nature, the potential for defi-driven disruptions in the broader financial system and the real economy seems limited for now.

Furthermore, BIS criticizes the way in which defi declares its total decentralization when compared to the traditional financial market. The organization argues that this decentralization is just an illusion and that the execution of defi today also carries centralization risks.

The report states that:

All deFi platforms have an element of centralization, which typically revolves around holders of “governance tokens” (often platform developers) who vote on proposals, not unlike corporate shareholders.

In addition, it makes the case for defi protocols to be considered legal entities due to this governance element. As most of the chains that host decentralized finance protocols are driven by proof-of-stake consensus algorithms, this also leads to some kind of centralization in the hands of big token bagholders.

Another interesting source of centralization, according to the review, are the growing links that the traditional finance world is establishing with these new protocols. This could cause spillover from traditional finance and from bridging companies to defi, affecting the operations of these protocols significantly.

What do you think about the latest report from the Bank for International Settlements, and its conclusions? Tell us in the comments section below.