What does this paper do and why?

Motivation: Tech drives Institutions & Economics

1. Technology and its limitations create constraints that shape
   • what can be done
   • how things are done
   • by whom they are done
2. The what, how, and by whom shape
   • institutions: the rules of engagement 
   • market structure & industrial organization: how firms and individuals interact and compete
3. This paper is primer text for what, how, and by whom for
   • Tradfi v. DeFi 
4. Starting point for how emergence of blockchain should trigger a re-think of
   • industrial organization of financial services
   • implications for institutional arrangements​

The what, how, and by whom

Example 1: What to do with your money?

keep money safe and arrange "distant" payments

(fractional) lending

banks and their vaults

Example 2: Markets for financial contracts

trading: we can't all be at the same place all the time

investment services, data, ...

dealers, brokers & exchanges

What is TradFi and how is blockchain & DeFi different?

TradFi

• everything is driven by intermediaries
  • access to infrastructure
  • holding and operation of assets

DeFi

1. Self-custody of assets
2. Access to financial infrastructure
3. Free entry of service providers
4. Conceptually non-custodial services
5. Blockchain = common resource
6. Services = platforms

Blockchain-based Decentralized Finance in a Nutshell

Why do these differences matter? What do they do?

1. Self-custody of assets
2. Access to financial infrastructure
3. Free entry of service providers
4. Conceptually non-custodial services
5. Blockchain = common resource
6. Services = platforms

Implications of the Differences

1. Self-custody of assets
2. Access to financial infrastructure
3. Free entry of service providers
4. Conceptually non-custodial services
5. Blockchain = common resource
6. Services = platforms

Path forward for Financial Institutions

intermediaries are no longer necessary

some things won't change, however \(\ldots\)

• a blockchain itself is not a market
  • investors/traders need to find one another
  • issuers need "distribution"
• investors worry about
  • disclosures, info asymmetry, market manipulation
• traders worry about
  • liquidity
  • counterparty risk/delivery
• society should worry about concentration risk because of the massive scale advantages in finance

What's my view on policy?

1. Establish self custody as a fundamental right
    
2. Privacy rights and revamp the BSA
    
3. Allow creative destruction (more popular wording: allow innovation)
    
4. Enable self-regulation and embrace compliance incentives
    
5. do not embrace permissioned systems because they feel more comfortable

Policy views