Decentralized finance and regulation : enhancing the role of innovative techniques through regulation

In enhancing the role of innovative techniques which involve the use of distributed ledger technology platforms, consequences or implications of such techniques could initially focus on more obvious risks – such as those risks associated with financial stability, inadequate governance and control mechanisms in place, or cybercrime. However, consideration of climate risk related factors have increasingly made the aim of focus towards a sustainable future, a more popular and increasingly justified topic. In a recent report by the European Environmental Agency, it was highlighted that “ in comparison with alternative payment methods, Bitcoin was claimed to be 20,000 times more energy intensive than Visa – with an energy consumption for each Bitcoin transaction increasing to 635 kWh – an equivalent of electricity that could power approximately 21 US households for 1 day, based on 2019 estimates according to some analysts.” However there are also potential benefits to be derived from blockchain technology - one of which includes environmental protection, as further highlighted in the report. Notwithstanding, efforts and endeavors will still be required to address climate related impacts of engaging the use of such technologies. This paper will focus on other risks – as well as benefits to be derived through the use of innovative techniques such as smart contracts and decentralized finance in a rapidly evolving financial landscape. It will also highlight why central bankers and financial regulation have to adapt and evolve rapidly in engaging the use of supervisory techniques which will not only enhance the efficiency of the use of such innovative techniques but also facilitate an adequate and well balanced approached to regulation – one which whilst not overly regulating technology, seeks to ensure that the abuse or misuse of such technologies are appropriately regulated.