In a lecture to the University College London’s Blockchain Research Center on Wednesday, a top Bank of England advisor warned that decentralized finance is not as decentralized as it promises to be.
The absence of regulation and strong governance in the crypto industry is more than a burden to companies and a lack of safety for consumers; it is an existential threat, according to Carolyn Wilkins, an external member of the Bank of England Financial Policy Committee, in a discussion on October 19. Decentralized finance (DeFi) would be a smart place to start, according to her.
Carolyn Wilkins warned:
“Concentrations of power in proof-of-work and proof-of-stake systems, and other flaws in governance of crypto and DeFi, have already contributed to all-too familiar issues; top of the list are business failures, illegal activity and financial losses for investors.
If left unchecked, this state of affairs will erode trust among investors in crypto-based financial services and their customers, and could lead to financial stress more broadly.”
Wilkins quoted research from April 2022 that found that the top ten validators owned between 47% and 100% of the stakes in a sample of the 50 biggest by-market capitalization proof-of-stake platforms.
The central bank advisor acknowledged that digital asset regulation and laws are still in the works but urged the private sector and DeFi investors to do more to ensure the safety and good governance of projects and digital assets.
“It is in the interest of the private sector to be proactive. Major investors must ‘get up, stand up’ to demand change. It is critical that industry adopt best practices and codes of conduct to reinforce trustworthy behaviour and culture,” Wilkins said.
Wilkins cautioned that when it comes to proof-of-work blockchains, crypto miners might take advantage of their position by deciding how to process transactions or manipulating the market in what is known as maximal extractable value.
She also mentioned that open-source DeFi systems like Polkadot and MakerDAO have emergency powers that allow leadership teams to make decisions unilaterally.
Wilkins also mentioned that the traditional banking industry has begun to incorporate blockchains, adding urgency to the need for advancements from digital asset initiatives. She stated:
“The window for the crypto industry to improve its approach to governance is narrowing. Regulated firms in traditional finance are increasingly applying the underlying blockchain technology to traditional capital markets.
They will be in a better position to capture this market if the crypto industry does not get its house in order, if only because they have more familiar and battle-tested governance.”
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