BIS Official Says DeFi Ledgers Can Help Regulators

A new Bank of International Settlements (BIS) working paper calls for “embedded supervision,” a regulatory framework that provides for compliance in decentralized markets to be automatically monitored by reading the market’s ledger, in an effort to reduce the need for firms to actively collect, verify and deliver data. 

The argument came via Raphael Auer, the head of the BIS’ Eurosystem Innovation Hub, who originally published the piece in 2019 and revised it May 2022. 

Decentralized Finance (DeFi) is a term used to describe a wide range of financial applications built on the blockchain. The goal is to do the very thing the name requests, decentralize, finance. Get finance out of the institutions and into the hands of the people. 

While it is being touted as an amazing paradigm shift in finance by proponents, regulators around the world are raising red flags and deeming it necessary to regulate the space. 

The technology of “embedded supervision,” proposed by Auer, has attracted interest from policymakers, especially in Europe. The European Union’s executive arm responsible for proposing new legislation, the European Commission, is preparing to conduct a study measuring the potential impact of linking supervisory data applications to decentralized finance. 

While there are many benefits to embedded supervision, including potentially easing the conflict between data availability, the cost of data collection and verification, and privacy and further helping maintain the confidentiality of firms and their customers, skeptics are fearful this is a good idea in theory, but not in reality. 

Author: Tyler Irvin

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