This trend could have benefits for the financial services system, the report suggests, by reducing the systemic importance of certain institutions, enhancing competition and diversity.

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Yet decentralization could also pose new risks, the FSB warns. Decentralization could make accountability and legal liability less clear, create new sorts of concentration risks and exacerbate market trends (such as increasing volatility in the provision of credit).

Additionally, decentralization could make regulation more difficult — by expanding opportunities for regulatory arbitrage and undermining traditional supervision of centralized financial institutions.

“This should help avoid the emergence of unforeseen complications in the design of decentralized financial technologies at a later stage,” the report says.

Ultimately, these new risks could undermine confidence in the financial system, the report says.

“A more decentralized financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities,” the report states.

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