BIS: DeFi does not “democratize” finance

A recent paper by the Bank of International Settlements (BIS) entitled “DeFi lending: intermediation without information?” takes a critical look at DeFi, including refuting some claims proponents have about how it could create opportunities for greater financial inclusion and give the “financially excluded” access to credit.

In particular, the BIS noted that the need for over-collateralization means that DeFi doesn’t facilitate its stated goal of “financial inclusion”. Conversely, the requirement for a borrower to post more collateral than they wish to borrow excludes those who do not already have access to capital or assets.

Unless the borrower is wealthy enough – or was lucky enough to benefit from the price rally of cryptocurrency early on – DeFi fails to cater to households and (small) businesses who need capital to fund productive investment.

BIS, DeFi lending: intermediation without information?

However, the BIS paper also recognizes that DeFi presents opportunities for genuine innovation. For example, they note that smart contracts could be used to complement
automated underwriting in traditional finance and help to reduce the costs associated with financial intermediation.

See Also

Minimum of 30,000 transactions per second needed for digital pound: BoE and Treasury

Learn more about DeFi, crypto loans and overcollateralization:

• Cryptocurrency Loans and Lending Explained
• What is Compound Finance and How does it work?
• What is Aave?