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Can Decentralized Finance Provide More Protection for Crypto Investors?

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Abstract

Several centralized crypto entities failed in 2022, resulting in the cascading failure of other crypto firms and raising questions about the protection of crypto investors. While the total amount invested in the crypto sector remains small in the United States, more than 10 percent of all Americans are invested in cryptocurrencies. In this post, we examine whether migrating crypto activities from centralized platforms to decentralized finance (DeFi) protocols might afford investors better protection, especially in the absence of regulatory changes. We argue that while DeFi provides some benefits for investors, it also introduces new risks and so more work is needed to make it a viable option for mainstream investors.

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  • Agostino Capponi & Nathan Kaplan & Asani Sarkar, 2022. "Can Decentralized Finance Provide More Protection for Crypto Investors?," Liberty Street Economics 20221221, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:95363
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    File URL: https://libertystreeteconomics.newyorkfed.org/2022/12/can-decentralized-finance-provide-more-protection-for-crypto-investors/
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    More about this item

    Keywords

    Crypto; cryptocurrencies; decentralized finance; DeFi; regulations; financial intermediation; fire sale;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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