DeFi can be mainstreamed by central banks, says a Swiss National Bank official

By: Mark Jessy

DeFi can be mainstreamed by central banks, says a Swiss National Bank official

September 30, 2022 10:47 PM

An official from the Swiss National Bank has stated that a balance between centralized and decentralized approaches is ideal for the growth of crypto and DeFi.


According to a Swiss central bank official, CBDCs can complement DeFi and have the potential to significantly increase DeFi adoption.


Thomas Moser, a member of the Swiss National Bank's governing board, argues that, among the many different kinds of digital currencies, CBDC could provide more stability and lower risks to the development of DeFi (SNB).


Moser told Cointelegraph that stablecoins were developed because businesses like DeFi require stable currency in order to expand.


Moser argued that despite their apparent opposition, centralization is not bad for DeFi and can therefore work in tandem with decentralization in digital currencies. He mentioned that the most popular stablecoins in DeFi are the centralized ones, such as Tether (USDT) and USD Coin (USDC).


According to the SNB representative, "something centralized" has helped DeFi significantly so far.


Moser argued that central bank money "does not entail counterparty risk," making a CBDC safer for DeFi than a redeemable stablecoin like Tether or USD Coin. In addition, "a central bank cannot go insolvent mostly because it issues irredeemable money," he said.


There is no counterparty risk because Bitcoin (BTC) and Ether (ETH), among other digital currencies, are not redeemable. However, the official remarked, their price is not stable enough to support perpetual DeFi expansion.


According to Moser, "Algorithmic stablecoins would not also involve counterparty risk, but again, we haven't seen effective algorithmic stablecoins," alluding to the demise of TerraUSD (UST) in May 2022. The official went on to say that "a CBDC may offer more safety and reduce risk than stablecoins."


Moser's comments followed the September 26 publication of a joint paper on blockchain technology and CBDC by the SNB and the blockchain firm Cypherium. According to the results of the research, CBDCs have the potential to be a helpful tool for bringing stability to the cryptocurrency economy and the DeFi industry.


The paper cited recent comments made by François Villeroy de Galhau, governor of the Banque de France, who claimed that CBDC is "not about the big brother of central banks threatening the free world of decentralized finance." As he put it, CBDCs are more concerned with "providing further resources to make DeFi effective and reliable."


The SNB's research isn't the first time a central bank has considered how CBDCs and DeFi might interact. At a conference held in April 2022 and co-hosted by the Bank for International Settlements' Innovation Hub and the SNB, central bank officials discussed the potential for interactivity between DeFi-based markets and CBDC.


As has been widely reported, CBDC has been met with widespread public opposition due to privacy concerns, with some even dubbing related projects "slavecoins." Since the world hasn't seen too much support for crypto from central banks, it remains to be seen if they are truly willing to contribute to the adoption of DeFi.


Large financial institutions in Europe have been experimenting with CBDC for international retail and remittance payments, so this news comes at a convenient time. Another initiative to try out cross-border payments in CBDC was announced on September 28 by the central banks of Sweden, Norway, and Israel.