F E A T U R E instruments phasing the sale of assets and smoothing price volatility .
F E A T U R E instruments phasing the sale of assets and smoothing price volatility .
Risks remain
In short , DeFi could drive significant innovation and democratisation in the financial sector . Yet it ’ s important to be clear sighted about the operational , regulatory and technology risks . Having a digital gilt will require a wholesale digital pound – that is , a pound that is a cryptoasset and uses DLT platforms for its issuance and the control of money supply . This is because a digital pound could enhance the speed , efficiency and functionality of digital gilts , enabling frictionless transactions with orders-ofmagnitude lower transaction costs when compared with TradFi and its much higher settlement times .
Transactions with the digital pound will be faster than those for a physical pound . Whilst the difference will only be fractions of a second , in foreign exchange trading , these small margins matter . If a digital pound is traded quicker , it opens the possibility of closing a trade , and then using the smalltime difference to either hedge the trade using a physical pound or manipulate the market through liquidity constraints .
There is also the risk that a DLT-enabled digital pound could affect the value of money . The decentralised nature of DeFi means that no central authority controls a digital asset once it has been released . The owner of a digital asset could therefore opt to destroy it , deleting the data and digital representation of its physical counterpart , and a bad actor could try to influence the money supply by acquiring and destroying digital pounds in significant quantities . These potential unintended
consequences will need to be thought through and addressed .
Role of data
While technological innovation creates risks , technology – in the form of data analytics – also provides a way to manage and mitigate those risks . At the heart of DeFi is transaction data . Creating a digital gilt – and a digital pound – requires new levels of data , with higher quality customer data views and cleaner data processing .
In a DeFi-enabled world , data analytics will therefore be better able to monitor and track transactions . This will involve using the data properties of ‘ immutability ’ to know precisely when transactions occur , with a clearer view on transaction patterns . There will need to be new thinking about how to ethically create and track DLT-enabled financial products ,
Christopher Hinitt , PA Consulting ’ s Digital Banking and Operations Lead
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