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Cryptocurrencies and decentralised finance: functions and financial stability implications

Author

Listed:
  • Aquilina, Matteo
  • Cornelli, Giulio
  • Frost, Jon
  • Gambacorta, Leonardo

Abstract

Cryptocurrencies and decentralised finance (DeFi) aim to replicate many of the economic functions of traditional finance (TradFi), but their distinctive features introduce new financial stability risks. We analyse these features, and examine key developments, such as smart contracts, decentralised exchanges (DEXs), stablecoins and new forms of central bank money. Our findings suggest that while the underlying economic drivers are not different than in TradFi, DeFi poses significant challenges, including new forms of information asymmetries, market inefficiencies and the risk of cryptoisation in emerging markets. We propose tailored regulatory interventions, such as embedding rules within smart contracts and strengthening the oversight of stablecoins, to manage financial stability risks. Finally, we provide a framework for prudential regulation that can mitigate risks while fostering innovation in the rapidly evolving crypto ecosystem.

Suggested Citation

  • Aquilina, Matteo & Cornelli, Giulio & Frost, Jon & Gambacorta, Leonardo, 2025. "Cryptocurrencies and decentralised finance: functions and financial stability implications," CEPR Discussion Papers 20178, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20178
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    File URL: https://cepr.org/publications/DP20178
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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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