“DeFi is revolutionary,” Medcraft says. “It is the next frontier, definitely.”
Blunt message for intermediaries
The OECD will publish a report on DeFi soon, describing the potential for a wide range of financial services to be provided by automated computer protocols.
About $US60 billion ($81 billion) is currently invested in various DeFi projects, according to analysis and rankings website DeFi Pulse; the three-biggest – Aave, InstaDapp and Compound – involve lending against cryptocurrencies pledged as security.
While bitcoin can operate as a means of payment or as a new form of commodity, DeFi projects go further, from lending to insurance and derivatives.
If you are at the cutting edge at the moment, as a regulator, this is what you are thinking about.
— Greg Medcraft
Medcraft’s message for banks and regulators is characteristically blunt: blockchain will challenge the role traditional intermediaries have played across economies.
Fast-paced developments are already shaping business and markets in ways that policymakers don’t fully understand.
Blockchain business models can reduce costs and make markets more transparent, but, as OECD’s extensive policy work on blockchain shows, many new challenges will arise.
These include new operational risks in underlying blockchains, vulnerabilities in the “smart contracts” that execute business rules, and difficult questions on interconnecting systems, scalability and energy consumption.
Medcraft says he isn’t selling his bank shares just yet. The arrival of mainstream central bank digital currencies (CBDCs), which will enable DeFi, are perhaps five years away, he predicts, while the emergence of the new internet-based finance system is probably an issue for the 2030s.
But “if you are at the cutting edge at the moment, as a regulator, this is what you are thinking about,” he says. “When I arrived here, no one really knew what blockchain was.”
Unregulated, legal grey area
Like other jurisdictions, Australia is grappling with digital finance policy. Entrepreneurs currently operate in an unregulated, legal grey area.
The Senate Select Committee on Australia as a Technology and Financial Centre is considering new policies that will provide certainty on how blockchain-based finance projects can be created safely; dozens of submissions have been made over the past few weeks.
Medcraft says the immediate priority for policymakers is ensuring someone is legally responsible for decisions made by the new business models. He points to developing principles on the explainability of decisions made by artificial intelligence systems as a good place to start.
“With DeFi, there is no friction. It is fast, and it can be transparent. You are looking at replicating lots of existing parts of banking,” he says. “But from a regulatory perspective, it still needs some form of responsible person or entity to actually oversee it. It has to have some person that is responsible.”
He considers it inevitable that governments will issue digital versions of paper money, which may sit alongside private “stablecoins” (digital currency whose value is pinned to an underlying fiat currency), to enable payments to settle reliably in real time on blockchains. Once CBDCs are available, DeFi will emerge more quickly, he predicts.
“Digital currencies and digital identity are an important part of enabling DeFi, and once you have these, you essentially have the missing pieces. You will have a complete, liberalised digitised environment which can enable something like DeFi.”
During his time at the OECD, Medcraft oversaw policy work on a wide range of areas, including corporate governance, anti-corruption, competition, consumer protection, capital and financial markets, pensions and insurance. He’s proud of his directorate’s work connecting ESG principles to International Financial Reporting Standards, and projects on infrastructure funding but he considers the work on blockchain and digital finance as the most important.
‘I have had a few approaches’
Leaving Paris was a tough call. Former finance minister Mathias Cormann joined the OECD as Secretary-general in June, and Medcraft says Cormann was keen for him to stay on, but COVID-19 made it impossible to commute. “We are both sad I am going. He knows me and trusts me and I trust him. I really wanted to be here.”
Medcraft declined to discuss the state of ASIC, which has seen his successor as chairman, James Shipton, depart amid political pressures, but he admits it’s been tough to watch.
“I just feel sad to be honest. The people who do the job there, it’s not an easy job and they are devoted people. It’s a pretty thankless job and a pretty lonely job at times. But it’s important.”
Medcraft will stay on as director of think tank Salzburg Global Seminar, and is keen to stay involved with the European Australian Business Council.
He’s keeping his options back at home close to his chest, but says he’s interested to do something in the finance sector. “I will take a bit of time,” he says. “I have had a few approaches.”