Credit enhancement and DeFi: Difference between pages

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imported>Doug Williamson
(Add quote - source - Bank of England - https://www.bankofengland.co.uk/speech/2021/october/jon-cunliffe-swifts-sibos-2021)
 
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1. ''Credit risk - securities''.
''Cryptoassets - cryptocurrencies.''


In the context of securities, credit enhancment is increasing the creditworthiness of securities.
DeFi is an abbreviation for ''decentralised finance''.


Historically there were three main methods of credit enhancement in the private sector:
DeFi is an alternative system to CeFi.


#Junior/Senior tranches: The entire debt is divided into so-called junior and senior tranches, with the former bearing all the first losses.  Thus, the credit standing of the remaining senior tranches is raised considerably.
#Insurance: A third party, usually an insurance company, undertakes to insure the credit risk of the respective securities (called ‘wrapping’).
#Collateralisation: Securities may be backed by other financial assets, usually equity, of higher values.  The difference serves as collateral for the repayment of the debt (overcollateralisation). The issuing company may also put collateral on the differential between the respective security’s original value and its current market value (margin).


DeFi enables the lending and borrowing of cryptoassets without using a central exchange.


The term 'credit enhancement' is now used in a much wider sense, to include additionally various forms of support provided by national governments, government-sponsored agencies and international agencies.
DeFi services are algorithmic-based services that rely on smart contracts and are delivered over distributed ledger technology platforms without intermediaries.




2. ''Credit risk management''.
:<span style="color:#4B0082">'''''DeFi's regulatory challenges'''''</span>


Any form of credit risk reduction.
"The highly decentralised and global structure of the DeFi sector along with the difficulty to trace end users provide a unique set of challenges for regulators.  


Also known as ''credit support''.
Even on an initial view it is clear that the sector is opaque, complex and undertakes financial activities that carry risk – activities that are regulated with the traditional financial sector.
 
 
... the degree of decentralisation currently varies across platforms.
 
However, in an extreme form, a DeFi platform could be completely decentralised with no identifiable legal entity, ownership nor even a point of human contact.
 
DeFi is still in its early infancy but its rapid growth means that regulators, domestically and internationally, need to think seriously now about the risks of a broad range of financial services being effected through DeFi platforms and how to ensure risks are managed in the DeFi world to the same standards as they are managed in traditional finance."
 
:''Is 'crypto' a financial stability risk? - Bank of England - Jon Cunliffe, Deputy Governor, Financial Stability - October 2021.''




== See also ==
== See also ==
* [[Collateral]]
* [[Bank of England]]
* [[Credit]]
* [[CeFi]]
* [[Credit risk]]
* [[Crypto]]
* [[Credit support]]
* [[Cryptoassets]]
* [[Encumbrance]]
* [[Cryptocurrency]]
* [[Security]]
* [[Distributed ledger]]
* [[Tranche]]
* [[Exchange]]
* [[Unbacked]]
* [[Financial stability]]
* [[Intermediary]]
* [[Prudential]]
* [[Regulation]]
 
 
==External link==
*[https://www.bankofengland.co.uk/speech/2021/october/jon-cunliffe-swifts-sibos-2021 Is 'crypto' a financial stability risk? - Bank of England - Jon Cunliffe, Deputy Governor, Financial Stability - October 2021]


[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Long_term_funding]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]
[[Category:Financial_products_and_markets]]
[[Category:Technology]]

Revision as of 20:44, 13 November 2021

Cryptoassets - cryptocurrencies.

DeFi is an abbreviation for decentralised finance.

DeFi is an alternative system to CeFi.


DeFi enables the lending and borrowing of cryptoassets without using a central exchange.

DeFi services are algorithmic-based services that rely on smart contracts and are delivered over distributed ledger technology platforms without intermediaries.


DeFi's regulatory challenges

"The highly decentralised and global structure of the DeFi sector along with the difficulty to trace end users provide a unique set of challenges for regulators.

Even on an initial view it is clear that the sector is opaque, complex and undertakes financial activities that carry risk – activities that are regulated with the traditional financial sector.


... the degree of decentralisation currently varies across platforms.

However, in an extreme form, a DeFi platform could be completely decentralised with no identifiable legal entity, ownership nor even a point of human contact.

DeFi is still in its early infancy but its rapid growth means that regulators, domestically and internationally, need to think seriously now about the risks of a broad range of financial services being effected through DeFi platforms and how to ensure risks are managed in the DeFi world to the same standards as they are managed in traditional finance."

Is 'crypto' a financial stability risk? - Bank of England - Jon Cunliffe, Deputy Governor, Financial Stability - October 2021.


See also


External link

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