Central Banks Could Popularize DeFi, According To The Swiss National Bank

A representative of the Swiss National Bank claims that the growth of crypto and DeFi requires a balance between centralization and decentralization.

According to a Swiss central bank official, central bank digital currencies (CBDCs) have a lot of potential to increase the adoption of decentralized finance.

The CBDC, among a wide range of digital currencies, can offer more stability and reduced risks for the development of DeFi, according to Thomas Moser, a board member of the Swiss National Bank (SNB).

According to Moser, stablecoins were created because DeFi requires stable money to expand, and stablecoins undoubtedly aided DeFi in gaining popularity.

Although they are diametrically opposed, centralization and decentralization in digital currencies can coexist, according to Moser, because centralization isn’t necessarily bad for DeFi. The two most popular stablecoins in DeFi are Tether and USD Coin, both of which are decentralized.

The SNB representative stated, “So anything ‘centralized’ improved DeFi quite a bit.

Because central bank money “does not contain counterparty risk,” according to Moser, a CBDC would pose fewer hazards to DeFi than a redeemable stablecoin, unlike Tether or USD Coin. Because they issue unredeemable currency, central banks cannot declare bankruptcy, he claimed.

There is no counterparty risk with other types of digital currency, such as cryptocurrencies like Bitcoin or Ether, which are similarly irredeemable. The official did point out that their prices aren’t steady enough to encourage long-term DeFi growth, though.

In reference to the demise of TerraUSD (UST) in May 2022, Moser stated that “algorithmic stablecoins likewise do not contain counterparty risk, but we have not seen successful algorithmic stablecoins thus far.” Stablecoins,” said the representative.

Moser’s comments were made immediately after a joint post on September 26 about blockchain technology and CBDC was published by SNB and the blockchain company Cypherium. According to the study’s findings, CBDCs could be an effective instrument for stabilizing the cryptocurrency economy, including the DeFi industry.

François Villeroy de Galhau, governor of the Banque de France, was quoted in the newspaper as saying that the CBDC “is not tied to the big brother of central banks that threatens the free world of decentralized finance” in his final statement. He made it clear that the purpose of CBDCs is to “provide more instruments to help make DeFi successful and sustainable.”

The Cypherum CEO, Sky Guo, declared that the DeFi and CBDC technology combination is “doomed”: DeFi is entirely automated and able to liberate CBDC from human limitations. We may anticipate that this market will get hundreds of billions of dollars in new liquidity thanks to the CBDC employed in DeFi, as well as participation from major institutions and the on-chain movement of physical assets.

It’s not the first time a central bank has thought about potential linkages between CBDCs and DeFi; the SNB’s research is not unique. At a symposium co-hosted by the SNB and the Center for Innovation of the Bank for International Settlements in April 2022, central bank representatives discussed the potential interactions between DeFi-based markets and CBDC. As was previously said, the public is generally against the concept of a CBDC since it lacks privacy, and many people refer to such initiatives as “slavecoins.” The globe hasn’t seen much central bank backing for cryptocurrencies, so it’s unclear whether they will genuinely contribute to the adoption of DeFi.

Major European banks are still testing cross-border retail and remittance payments with CBDC as this news is being released. The central banks of Sweden, Norway, and Israel unveiled a new experiment to test international payments on September 28 at CBDC.