Web3’s Impact on Financial Services

The Federal Reserve Bank of Atlanta’s recent publication in its Policy Hub series on the implications of Web3 for financial services has piqued the interest of the crypto community.

The 17-page paper by Christine Parlour, a professor at the Haas School of Business at the University of California, Berkeley, is comprehensive and intended as an introductory text.

The paper begins with a discussion of blockchains, explaining that “data is sorted and stored in specific locations called ‘wallets’ or ‘addresses.'”

After providing context, Parlour examines decentralized finance (DeFi) and financial infrastructure.

Parlour discusses the regulatory challenges posed by decentralized autonomous organizations (DAOs), which lack “an obvious legal entity” with which to interact. Furthermore:

“The darker side of using tokens as collateral is that it generates interconnectedness among various protocols, which makes estimating or understanding systemic risk more challenging for regulators.”

The discussion in Parlour contains numerous brand names of lending protocols and stablecoins.

According to Parlour, Web3 financial infrastructure offers advantages over traditional finance regarding transaction costs and speed.

Trade finance can be significantly enhanced, for instance, by reducing costs along the supply chain.

The paper touches on central bank digital currency (CBDC) when discussing foreign exchange and examining the recently launched Project Mariana, which seeks to apply DeFi protocols to foreign trade.

Parlour mentions Stellar and Ripple and describes the XRP token for Ripple as “envisioned as an international payment medium or wholesale settlement coin.”

Ripple’s agreements with states like Montenegro to develop CBDCs have garnered significant attention.

The Federal Reserve has not confirmed rumors that it intends to introduce a CBDC, which have been widely circulated.

Parlour does not indicate any such plans or that the Fed is considering utilizing XRP for any purpose.

XRP’s status as a security is the subject of a legal dispute between Ripple and the Securities and Exchange Commission.

In addition, Parlour discusses tokenized bank deposits, a concept promoted by the USDF Consortium, whose CEO Robert Morgan recently described it as a “third way” between traditional finance and DeFi at a House of Representatives hearing.