ECB's Ulrich Bindseil has analysed the impact of blockchain technology on payments and settlements. His research highlights that decentralised networks such as cryptocurrencies offer unprecedented efficiency, transparency and automation, although he warns of technical and regulatory risks.
Blockchain technology has moved from a fringe concept to a central theme in the design of future financial infrastructures. Ulrich Bindseil, director general for market infrastructure and payments at the European Central Bank (ECB), detailed in a recent research how decentralized public networks, used in cryptocurrencies such as Ethereum and decentralized financial protocols (DeFi), could transform payment and settlement systems.
According to the study, blockchain technology allows instant transactions, accompanied by a Continuous operation y liquidation of multiple assets on a single platform.
PREPARE YOUR WALLETUnlike traditional systems, which rely on intermediaries such as banks and clearinghouses, these blockchain networks operate with automated validation and immutable ledgers. As such, Bindseil notes that while technical and regulatory challenges remain that need to be addressed, the adoption of decentralized architectures could solve long-standing problems such as high cross-border costs and settlement delays.
Bindseil highlights the core advantages of blockchain technology
In a article of research entitled “Public crypto networks as financial market infrastructures”, Bindseil, together with Omid Malekan of Columbia University, explained that blockchain networks offer real-time liquidity, allowing instant transactions 24 hours a day without geographical borders. He compared this technology to traditional systems such as the ECB's TARGET2, which operate on limited hours and require intermediaries, to highlight that blockchains such as Solana or Ethereum process payments in seconds with minimal fees. According to Bindseil, this is key to optimizing international transfers, where currently a transaction can take days and cost up to 6,3% of the amount sent.
In addition, blockchain technology allows manage multiple assets, from currencies to stocks, on a single infrastructure, avoiding fragmentation.
For example, decentralized platforms such as Uniswap facilitate the exchange between cryptocurrencies and tokens linked to real assets, such as bonds or commodities. The director highlighted that this capability, called “omni-asset,” significantly reduces operational complexity and risks such as Herstatt, where cross-settlement failures generate million-dollar losses in traditional systems.
DeFi Protocols: The Testing Ground for Decentralized Finance
The research study also highlights the advantages, benefits and risks of decentralized applications (dApps), such as Aave, which focuses on lending, or Compound, which focuses on automated savings. These dApps operate with smart contracts and self-executing codes that eliminate the need for intermediaries.
Bindseil stressed that these protocols, although associated with cryptocurrencies, could be adapted for traditional services. For example, flash loans, which are unsecured loans that are settled in seconds on the chain, are impossible in conventional banking systems, but in DeFi they are a reality that allows efficient arbitrage between markets.
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However, it is not all about advantages and benefits, as Bindseil also highlighted the potential risks behind the innovation of these technologies. The study addresses several of the exploits that have occurred in decentralized protocols, such as Euler Finance, which left losses of around $200 million dollars, exposing vulnerabilities in poorly audited codes. In addition, the volatility of assets in DeFi and the dependence on stablecoins such as USDT for operations raise questions about systemic stability, he indicated.
Between innovation and regulation
From another perspective, Bindseil argues that the extreme decentralization of blockchain technology can also become a double-edged sword. Unlike banks, public networks such as Bitcoin, Ethereum and Solana do not have mechanisms to reverse fraud or errors. In addition, he believes that, due to their design and operation, regulatory frameworks do not yet address all these complexities, so legal loopholes persist that have limited their use and adoption.
Bindseil stressed that regulators in the European Union are moving towards regulating the crypto space with the implementation of MiCA, the Markets in Crypto-Assets Act, which requires licensing for stablecoin issuers and transparency in DeFi, but does not yet address the supervision of fully decentralized dApps. Therefore, she indicated that the ECB urges global frameworks that help mitigate risks and protect retail investors.
BUY BITCOINIn conclusion, the ECB expert acknowledges that blockchain technology, and specifically the DeFi space, represent a technical evolution with the potential to democratize financial services, reduce costs, and eliminate geopolitical barriers. However, its mass adoption also requires resolving key dilemmas such as ensuring security without centralization and balancing privacy with regulatory compliance, among others.
The challenge, according to Bindseil, is to integrate the decentralized innovation of blockchain technology and the traditional stability of the current system. Therefore, the future is not about choosing between old or new systems, but about designing hybrid infrastructures that take advantage of the best of each, he concluded.
Investing in cryptoassets is not fully regulated, may not be suitable for retail investors due to high volatility and there is a risk of losing all invested amounts.
