On 6 June 2019, the Financial Stability Board (FSB) published a report considering the implications of decentralised financial technologies. The report considers the financial stability, regulatory and governance implications of the use of decentralised financial technologies such as those involving distributed ledgers and online peer-to-peer, or user-matching, platforms.

The report focuses on technologies that may reduce or eliminate the need for intermediaries or centralised processes that have traditionally been involved in the provision of financial services. Such decentralisation generally takes one of three broad forms:

  • the decentralisation of decision-making;
  • the decentralisation of risk-taking; or
  • the decentralisation of record-keeping.

The report notes that the application of decentralised financial technologies – and the more decentralised financial system to which they may give rise – could benefit financial stability. It may also lead to greater competition and diversity in the financial system and reduce the systemic importance of some existing entities.

The report does, however, note that the use of decentralised technologies may entail risks to financial stability. These include the emergence of concentrations in the ownership and operation of key infrastructure and technology, as well as a possible greater degree of procyclicality in decentralised risk-taking. New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system

These noted issues may pose challenges for financial regulatory and supervisory frameworks, particularly those that currently focus on centralised financial institutions. A more decentralised financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities.

The FSB recommends authorities to consider the implications of decentralised financial technologies on: financial regulation and regulatory approaches; financial supervision; and the proportional and consistent application of regulation. Due to the likelihood of financial technologies evolving rapidly, the FSB urges progressive dialogue between regulators and stakeholders to ensure that regulatory and other public policy objectives are considered in the initial design of technical protocols and applications.