The Bank of Korea stated that “blockchain and decentralization may form a new financial paradigm”

The Bank of Korea predicts that the decentralized technology based on blockchain may form a new financial paradigm in the future. However, it is not easy for a decentralized system like DeFi to become a new financial paradigm.

The Bank of Korea issued a report on the possibility of a paradigm shift in the financial sector following digital innovation on the 8th.

The Bank of Korea stated that “although many encrypted assets are developed and managed by private companies, the rapid growth of the digital economy even has the possibility of replacing legal tender, and a new financial ecosystem that is different from the existing system has been formed.”

The Bank of Korea stated that although “the controversy over the currency function of encrypted assets continues,” some people believe that encrypted assets can be used as a means of exchange and value storage in the future to perform the same functions as legal currencies.

“Blockchain-based decentralization may form a new financial paradigm.” The Bank of Korea assessed that fund brokerage services based on encrypted assets (blockchain) can achieve direct peer-to-peer (P2P) without the intermediary of existing financial institutions. Transaction reduces the cost of financial transactions.

In particular, stablecoins designed to maintain a stable value by linking to legal currencies are expected to be very likely to be used in fields such as the encrypted asset ecosystem, virtual network payments, and cross-border remittances.

The Bank of Korea commented: “With the popularization of the digital economy and financial environment, security and reliability have become more important, so Defi is expected to form a new financial paradigm based on blockchain technology.”

However, regardless of whether cryptocurrency will replace legal currency in the future, cryptocurrency will continue to exist as a means of investment or speculation in the private sector.

“Even if DeFi is established, traditional finance will still exist.” The Bank of Korea has a negative view of decentralized systems such as DeFi, saying that it cannot replace the traditional financial system.

The Bank of Korea explained that “DeFi may become an alternative to finance based on trust and sharing. It is different from’CeFi’. For example, virtual currency exchanges operate as a centralized trading system instead of a blockchain.”

Although the recent fast-developing financial technology and large technology companies have launched various financial services, they are not significantly different from the services of existing financial companies. DeFi is trying to build a comprehensive financial service system by extending its services to deposits, loans and custody, and payment services without intermediaries.

However, DeFi is still in its infancy, and the market size only accounts for 0.03% of U.S. commercial bank deposits (as of June 2021). As far as the current situation is concerned, the Bank of Korea predicts that the operation through traditional financial intermediaries will continue to exist.

The Bank of Korea believes that the reliability of blockchain technology, basic asset risk management, and legal compliance must be fully available before Defi finance can be popularized on a large scale. It will still take a long time for DeFi to become a common form of financial transactions.

However, with the expansion of the digital economy and the acceleration of the segmentation of digital assets, the role of DeFi will continue to increase.


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