In a Wednesday speech, an external member of the UK central bank’s financial policy committee highlighted the pitfalls associated with decentralized finance governance. In the speech, the speaker suggested that the private sector should be more involved in shaping the best practices for the crypto industry.
In a speech on Wednesday to the University College London Blockchain Research Center, a senior bank advisor suggested that decentralized finance may not be as decentralized as it claimed to be.
“Concentrations in power in [proof of-work] or [proof of-stake] systems, as well as other flaws with governance of crypto and DEF, have all contributed to all-too-familiar issues; top on the list is business failures and illegal activity, financial losses for investors,” said Carolyn Wilkins, an ex-leader for Canada’s central banks. This state of affairs, if unchecked will lead to financial stress and erode trust between crypto-based investors and their customers.
Wilkins referenced a April 2022 study that found that the top ten validators had between 47% to 100% stakes in a sample from the 50 most valuable proof-of-stake platform market capitalization.
Although the central bank advisor acknowledged that regulations and legislation regarding digital assets are still in development, he urged the private sector as well as DeFi investors to take greater steps to ensure the safety and proper governance for projects and digital assets.
Wilkins stated that it was in the most immediate interest of the private sector for them to be proactive. Major investors need to ‘get up and stand up’ in order to push for change. To reinforce trustworthiness and culture, it is crucial that the industry follows best practices and adheres to codes of conduct.
Wilkins cautioned that crypto miners could take advantage of proof-of-work blockchains by making decisions about how to execute transactions or manipulating the market to achieve maximum extractable, Wilkins also observed that open-source DeFi platforms such as Polkadot or MakerDAO provide emergency powers to enable leadership teams to make unilateral decisions.
Wilkins noted that even though the financial industry has adopted blockchains, lending is a pressing need.
Wilkins stated that the time frame for the crypto industry’s improvement in governance is shrinking. “Regulated financial institutions are applying blockchain technology more frequently to traditional capital markets,” Wilkins said. They will be better positioned to capture this market, even if the crypto sector does not clean its house. This is due to their more experienced and battle-tested governance.
