BIS Official Says DeFi Ledgers can Assist Regulators

The Eurosystem Innovation Hub of the Bank for International Settlements (BIS) is headed by Rapahel Aeur, who recently talked in favor of decentralized finance or DeFi, as it is commonly known. He penned down a working paper in which he highlighted that it was possible to regulate the DeFi space by taking advantage of the trust-creating mechanisms of the sector itself in order to obtain compliance data. He published the paper on Wednesday, which was titled ‘Embedded supervision: How to build regulation into decentralized finance’. He has argued that companies do not have to make the effort of actively collecting any data, nor worry about verifying and delivering it.

This is due to the fact that they just need to check the market ledger in order to monitor the companies that are operating in the DeFi space. The decentralized finance world has become a rather popular one and this term refers to financial applications that are free of the interference of intermediaries and are operating on a blockchain. Distributed ledgers are used for the development of these applications, which are then used for maintaining a record of transactions and can also come in handy for verifying data.

While Web3 enthusiasts and the crypto community has championed the decentralized finance space and platforms, it has become a major concern for regulatory authorities all over the world. They have sounded an alarm over the need of supervising the DeFi market because there are absolutely no intermediaries involved. BIS conducted a quarterly review back in 2021 in which it concluded that the decentralization promised in the DeFi space is nothing more than an illusion. The central banks’ umbrella group argued that the DeFi control could be controlled by regulatory authorities if some centralized points are established within it.

Nonetheless, it is important to note that since then, regulators have not been able to make much headway when it comes to oversight in the DeFi world. But, policymakers have certainly been drawn to the idea of technology that has supervision embedded in it. Therefore, lawmakers reached out to the European Commission to conduct a study for evaluating the impact of decentralized finance to supervisory data applications. This is the European Union’s executive arm that holds the responsibility of drafting new legislation and it was asked to conduct the study, so it could potentially come up with legislation later.

However, many are skeptical about the possibility of supervising smart contracts that have an unchangeable code. Some experts believe that the concept of embedded supervision may sound nice, but it is not practical. They believe that it is not possible to implement it because that would mean that regulators would have to get access to all transactions, which is something that cannot be done. The decentralized finance (DeFi) space has also grown quite quickly and its decentralized nature appeals to plenty of people around the world because it means that there are no central authorities involved, but this also means there can be no recognition.