The mix of centralization and decentralization is the perfect mix for crypto and DeFi development, for Swiss National Bank officials.
Central bank digital currencies (CBDC) can work well with decentralized finance (DeFi), and they have a lot of power to increase DeFi adoption, for Swiss central bank officials.
Among the various types of digital currencies, it is the CBDC that can provide more stability and lower risk for the development of DeFi, for Thomas Moser, member of the regulatory board at the Swiss National Bank (SNB).
To thrive, DeFi needs normal money, which is why stablecoins were created, and stablecoins have definitely helped DeFi become more popular, Moser told Cointelegraph.
While opposites, centralization and decentralization in digital currencies can actually work together because centralization is no less good for DeFi, Moser comments. He noted that major stablecoins such as Tether (USDT) and USD Coin (USDC) are the most widely used stablecoins in DeFi, both centralized.
"Therefore, something centralized has helped DeFi a lot," the SNB official said.
Unlike Tether or Circle, CBDCs will pose a lower risk to DeFi than exchangeable stablecoins because central bank money “does not require counterparty risk,” Moser said. “Central banks cannot go bankrupt, because they generate money that cannot be redeemed, ” he added.
Other types of digital currency, including cryptocurrencies such as Bitcoin (BTC) or Ether (ETH), are also non-redeemable, implying there is no counterparty risk. However, the costs are not normal enough to support the continued development of DeFi, the official said.
"Algorithmic stablecoins also don't want to pose counterparty risk, but so far, we haven't seen algorithmic stablecoins as successful," said Moser, referring to the collapse of TerraUSD (UST) in May 2022. "CBDCs can provide more stability and lower risk than stablecoins, ' added the official.
Moser's statement comes shortly after SNB and blockchain industry Cypherium published a joint paper on blockchain technology and CBDC on September 26. This research suggests that CBDCs can serve as useful tools to strengthen the cryptocurrency economy, including the DeFi zone.
The paper specifically mentions a recent statement by the Governor of the Banque de France François Villeroy de Galhau, who commented that the CBDC is “not about a big relative of the central bank criticizing the free world of decentralized finance.” He stressed that the CBDC would prefer to "provide further tools to help make DeFi successful and sustainable."
Cypherum CEO Sky Guo reports his belief that the mix of DeFi and CBDC technologies is “destined to exist,” reporting:
“DeFi is fully automated and can release CBDCs from human limitations. With CBDCs deployed in DeFi, we can expect hundreds and trillions of dollars of liquidity to be brought to this market, big institutions to enter this space and real-world legacy moving on-chain.”
The SNB's research is not the first time for the central bank to think about the possible interaction of CBDC and DeFi. In April 2022, central bank officials discussed the interactivity capabilities between DeFi-based markets and CBDCs at a conference co-hosted by the Innovation Center of the Bank for International Settlements and the SNB.