The swift expansion of Decentralised Finance (DeFi) has garnered increased scrutiny from regulatory bodies due to its potential risks and the absence of a central entity that can be held accountable. While DeFi offers certain benefits for the trading of security tokens, its decentralized structure challenges current regulatory systems that depend on centralized oversight. Global standard-setting bodies have therefore intensified their calls for regulators to address DeFi-related vulnerabilities. This document thoroughly analyses the difficulties associated with DeFi and proposes possible regulatory strategies. These strategies could involve overseeing entities with particular degrees of influence, such as developers and validators, integrating regulation through dedicated supervisory nodes, and/or establishing a reliable regulatory protocol layer. Yet, policymakers might be even more inclined to guide the financial market towards more centralized financial systems (CeFi) in the case of security tokens, which can be achieved by promoting the creation of regulatory sandboxes having a single entity asking for an authorization. This initiative could encourage the development of innovations that comply with regulations while reducing risks.
Central banks face rising cross-border supervision costs as banking groups operate across fragmented regulatory regimes, making traditional oversight mechanisms ineffective and increasing crisis risk. While a distributed ledger technology (DLT) settlement hub offers unified visibility, it introduces a novel Security Paradox: complex regulatory detection methods increase monitoring costs and collateral requirements, thereby risking the exit of compliant banks and systemic instability. This working paper presents a formal architecture for a multi-currency, permissioned regional DLT settlement hub-designed to address the complexities and inefficiencies of cross-border supervision and settlement-that maintains monetary sovereignty across jurisdictions. By adopting a "slashing reserve" model, in which coordinating central banks jointly set monitoring, penalties, transparency, and collateral, regional hub security is decoupled from collateral through efficient detection and a Byzantine-fault-tolerant quorum structure. This design enables capital-efficient, Basel-consistent settlement, ensuring stability and sovereignty, even during crises, and provides a blueprint for modern cross-border financial infrastructure.
Technologia rozproszonych rejestrów (DLT), która stanowi fundament Internetu Wartości (IoV), przekształca współczesne rynki pożyczkowe. Protokoły pożyczkowe, będące kluczowym komponentem zdecentralizowanych finansów (DeFi), oferują bardziej elastyczne narzędzia alokacji kapitału niż tradycyjne struktury finansowe. Protokoły DeFi, takie jak Compound, Maker i Aave, odpowiadają na wyzwania napotykane przez klasyczne rynki pożyczkowe, w szczególności banki i scentralizowane platformy pożyczkowe. Przedstawimy także szczegółowy opis mechanizmów działania tych protokołów, z uwzględnieniem ich innowacyjnych podejść do zarządzania ryzykiem oraz zabezpieczeniami. Pomimo swojej innowacyjności protokoły DeFi wciąż wykazują zależność od tradycyjnych systemów finansowych, co wskazuje na złożone relacje między tymi dwoma sektorami. Distributed Ledger Technology (DLT), which forms the foundation of the Internet of Value (IoV), is transforming modern lending markets. Lending protocols, a key component of decentralized finance (DeFi), offer more flexible capital allocation tools compared to traditional financial structures. DeFi protocols, such as Compound, Maker, and Aave, address challenges faced by conventional lending markets, particularly banks and centralized lending platforms. This paper also provides a detailed description of how these protocols operate, highlighting their innovative approaches to risk management and collateralization. Despite their innovation, DeFi protocols still exhibit dependence on traditional financial systems, illustrating the complex relationships between these two sectors.
Nikola Vukić, Veljko Petrović, Дину Драган, Dušan Gajić
Traditionally, smart contract auditing has been conducted using analysis tools and manual review processes. However, these tools often struggle to detect complex vulnerabilities and novel attack vectors. Advancements in Large Language Models (LLMs) have introduced new possibilities for enhancing smart contract audits by using their contextual understanding and reasoning capabilities. This paper provides a review of existing LLM-based smart contract auditing tools. We analyze key methodologies, strengths, and limitations of six such tools. While LLM-based tools demonstrate significant potential in detecting complex vulnerabilities, challenges such as false positives and token length limitations persist. Our comparative evaluation highlights performance differences, showcasing the potential of LLMs to complement traditional auditing tools. Finally, we discuss current challenges and future directions for improving LLM-based auditing, aiming to enhance security in blockchain ecosystems.
This chapter dives into the visions and the emergent imaginary of Web3. It shows how they operate as a response to a disillusionment with what the Web has become. Visioners of Web3 depict Web 2.0 as a corporate takeover of the Web and offer their vision of the Web as a way for users and creators to reclaim control and a fair share of the value they co-create. However, instead of resurrecting the idea of a post-ownership Commons unrestricted by the imperatives of commerce and property, Web3 seeks to erect a new kind of Commons that cannot be usurped and exploited by Big Tech. This requires a radical break with the economic innocence of the early Web. Instead of rejecting ownership and business it embraces them, with an eye to re-erecting the Web on the principles of tokenomics. Decentralized token ownership is meant to ensure more efficient and sustainable management of the shared Web infrastructures and resources while also ensuring genuine participation of Web users in the distribution of economic rewards and the governance of the Web Commons. This chapter concludes with a reflection on the (d)evolving imaginaries of the Web surveyed across this part of the book.
The implementation of open banking frameworks together with Application Programming Interfaces (APIs) creates significant market changes because they boost financial innovation as well as customer satisfaction while promoting market competition. The research study examines the impact of regulatory movements along with technical advancements which rebuilds conventional banking systems through open banking processes. The security of financial data exchange facilitated through open banking APIs allows financial institutions to link with third-party providers for delivering state-of-the-art personalized services and better access to credit and seamless payments. This analysis focuses on the opportunities along with issues that come from using open banking technology together with the necessity of standardizing API protocols because of privacy threats and digital security vulnerabilities. Open banking serves as a technology that builds financial inclusion by giving consumers full control of their financial data. The findings from industry studies with case examples demonstrate how open banking joint with APIs transitions finance toward a decentralized user-focused system that connects different entities. The research shows that open banking success depends on the teamwork between stakeholders while strong regulatory guides and innovative efforts drive complete exploitation of its potential
Smart contracts provide convenience to the financial industry by automating complex transactions without intermediaries. In the context of decentralized finance, ensuring the correctness, reliability, and efficiency of these automated systems is crucial, especially for loan management processes. This paper presents a formal specification of a smart contract-based loan management system using TLA+. The system is designed to handle various types of loans, including credit-based and collateral-backed loans, managing both regular and early repayments, as well as handling late payments and collateral forfeiture. Our specification defines key components such as loan states, repayment calculations, and collateral management, ensuring that all aspects of the loan lifecycle are rigorously modeled and verified. Safety properties, such as preventing negative loan balances and ensuring proper collateral ownership transfer, are enforced alongside liveness properties that guarantee the system reaches a termination state where all loans are either fully repaid or defaulted. We used the TLC model checker to verify the correctness of the system across all possible states and transitions. The verification process confirmed that the system consistently adheres to its formal specification under a variety of operational conditions. Through the formal specification and comprehensive verification with TLA+, this work enhances the dependability of smart contract based financial systems, providing a secure, verifiable, and resilient loan management framework ready for deployment in real-world DeFi environments.
This paper intends to examine the existence of riba elements (interest) in the products of cryptocurrency exchange companies locally in Malaysia and the international. Two of the chosen international cryptocurrency exchange companies, namely Huobi and KuCoin, and one local company, Luno Malaysia Sdn. Bhd., were analyzed based on their websites and applications. It was found that riba exist in the products offered by international cryptocurrency exchange companies, specifically crypto loans, and lending. Meanwhile, the local one does not offer a product that generates riba. It can be concluded the two products that generate riba seem to be mirroring foreign exchange trading, which comprises leverage and margin in loans and lending. Hence, it is suggested not to subscribe to lending and loans products offered by international cryptocurrency exchange companies. This study implies for Muslim investors, who deal with cryptocurrency. It is recommended to do future research on awareness of riba in the products of cryptocurrency exchanges among Muslim investors.
Since 2009, the process of creating virtual financial assets, in particular bitcoin, has been taking place in Ukraine, as in many countries of the world, and the scale of this activity is growing almost exponentially. The lack of state regulation creates the problem of lack of accounting and control of those negative effects on ecology and economy that arise in the process of creating virtual financial assets, i.e. mining. The work analyzes the findings of domestic and foreign scientists regarding the risks inherent in the creation of virtual financial assets, the main of which are the significant consumption of electricity produced from non-renewable sources, carbon and heat emissions, the use of clean water and the creation of electronic waste. Three stages in mining activity are defined and the problems of risk reduction inherent in each stage are defined. The first stage is decisive in terms of preventive actions regarding the risks that will arise in the next stage. At this stage, it is necessary to decide on the location of the equipment, the type of equipment that will be used in the mining process. In our opinion, providing mining with a unique code in KVED and introducing licensing of the specified activity are mandatory actions of the state on the way to reducing the risks associated with the creation of virtual financial assets. Licensing conditions must contain requirements for minimum energy efficiency, setting limits on the use of electricity and Internet traffic, and obligations regarding the safe disposal of electronic waste. At the second stage, it is important to choose the Proof-of-Stake consensus mechanism, which will allow you to save electricity. The third stage involves providing information on the type and amount of resources that were used during mining, as well as on the amount of carbon and heat emissions, during the release of the created assets to the market. This will enable investors to make informed decisions taking into account their attitude to environmental safety. The need for active actions by the state regarding the recognition of mining as a separate type of activity with its inclusion in the KVED and the introduction of licensing with the inclusion of requirements for reducing risks in miners’ activities in the licensing conditions is substantiated.
In the landscape of traditional banking and supply chain financing, numerous challenges persist, such as high costs, delays, and centralized, opaque financial systems.Our project, 'DBank,' leverages blockchain technology and decentralization to address these issues.The primary aim is to create a blockchain-based platform that integrates supply chain data with financial transactions, thereby reducing costs, improving cash flow, and enabling secure and efficient financing.Additionally, we aim to develop a user-friendly Decentralized Banking Application using Dfinity's Internet Computer and Motoko, which will allow account creation, deposits, withdrawals, and peer-to-peer transactions, fostering financial accessibility.The DBank web application is a transformative solution for supply chain financing challenges in India.It aims to seamlessly integrate supply chain data with financial transactions, addressing inefficiencies and high costs, and providing improved access to credit.Our research methodology included a comprehensive analysis of existing systems to inform the development of DBank.The expected outcomes include enhanced efficiency, transparency, and security in financing processes, reduced costs, and improved liquidity management, marking a significant milestone in India's financial technology landscape.
The advent of Web3 technology and the rise of decentralized finance (DeFi) have sparked a paradigm shift in the financial ecosystem. This paper delves into the transformative potential of DeFi protocols, exploring their structure, functionality, and impact on traditional financial systems. Through a comprehensive review of existing literature and empirical studies, we uncover the advantages and challenges associated with the adoption of DeFi. Our analysis highlights how DeFi platforms, including lending protocols, decentralized exchanges, stablecoins, and yield farming mechanisms, offer enhanced efficiency, reduced costs, and greater accessibility. However, we also underscore the critical issues surrounding security vulnerabilities, regulatory compliance, and market stability that must be addressed to ensure sustainable growth. By proposing critical research questions and suggesting future research directions, this paper contributes to the ongoing discourse on the role of DeFi in reshaping global finance and its potential to create a more inclusive, efficient, and transparent financial ecosystem.
This paper looks at how the securities industry can better manage coexistence between different message formats along with realising the many opportunities presented by available data. This is with a view to arriving at greater efficiency, profitability and interoperability within securities and across financial services. It begins with an overview of the quantities and types of data produced by the industry, discussing the costs and risks this poses if it is not sufficiently well managed. It then moves into a discussion of the need for a common language for all parts of financial services, including securities, to agree on in order to communicate more effectively. The paper focuses on using the global ISO 20022 standard for this purpose. It covers the question of migrating to it as a message format, for which there is little appetite within the securities industry in the short to medium term. ISO 20022’s central repository and data dictionary provide a solution, creating the common language that can help to ensure interoperability between entities. It includes discussion of the many benefits of using ISO 20022 in this way, such as reduced costs, risks and timeframes. It highlights how ISO 20022 as a data model can be applied to developing standardised application programming interfaces and building connections with emerging technologies and industries such as distributed ledger technology and crypto assets. The paper also looks at the risks and limitations posed by a prolonged period of coexistence. The use of a common data dictionary can enable firms to interoperate without having to align data exchanges at the syntax level; however, there are still associated costs, risks and inefficiencies. The conclusion is that securities market participants should collaborate to adopt a common data dictionary that can be integrated into their systems, their software and their processes.
The present research aims to analyze the legal relations that arise in the process of tokenization of real assets and their creation as a record certifying ownership in a blockchain network. The peculiarities of using non fungible tokens in the tokenization process and the legal issues raised by the tokenization process itself are discussed. The advantages and disadvantages of the technology at the current stage of the research are indicated and suggestions are given to overcome them.
The globalization of banking has led to an increase in cross-border financial transactions. However, latency in processing these transactions poses significant challenges due to the physical distance between data centers located across the globe. This latency impacts transaction speed, customer satisfaction, and regulatory compliance. This paper explores the root causes of data transition latency in cross-border banking transactions, highlights current solutions, and proposes innovative approaches to minimize latency. It emphasizes the importance of leveraging edge computing, optimized routing algorithms, and distributed ledger technologies to enhance transaction processing efficiency while maintaining security and compliance standards.
Blockchain technology has in recent years gained significant appeal worldwide in view of its potential to transform the way we do business. In this regard, one of the most attractive architectural concepts is the consortium Blockchain, where a group of peers, leveraging a common governance, collaborate to define rules and technology development. A consortium Blockchain is highly beneficial in a setting where multiple organisations operate in the same industry, but it is not immune from challenges, including investment, education and data standardisation. This paper provides an analysis of the evolution of Blockchain and Distributed Ledger Technology (DLT) technologies and the regulatory approach along with a practical case study on the use of Blockchain in the Italian banking sector. This sector has successfully pioneered the use of Blockchain/DLT with a new application, Spunta Banca DLT, for straight-through processing of interbank reconciliation. Finally, challenges, opportunities and important learnings are discussed.
In recent years, the blockchain technology has matured and established new opportunities in the digital world. With the release of the Blockchain 2.0, the Ethereum Network and smart contracts, it is now possible to operate applications decentralized and independently. These applications promise lower transaction costs, better efficiency and higher security. However, there is still a lack of in-depth understanding and standardization within the variety of recently developed smart contracts. In addition, there is still no proper taxonomy that structures the technical elements of a smart contract and makes them comparable. Hence, we develop a smart contract taxonomy using an inductive research approach. Following Nickerson et al. (2013) we analyze the smart contracts of 47 gambling DApps to identify the 18 dimensions and 41 characteristics of your technical and code-based taxonomy. In future research, we will continue to expand the developed taxonomy and include other application areas. Finally, a general taxonomy for research and product development will be available to science and practice, ensuring a consistent and standardized implementation of smart contracts.
Legal qualification of bitcoin, cryptocurrencies and "private money" in general raises doubts. Although, economically speaking, these goods perform some of the functions of money, they are not considered as such under the Polish civil code. This led some authors to argue that the rules on performance (and breach) of monetary obligations would not be applicable to cryptocurrencies. However, such a conclusion could cause unacceptable results, e.g. allowing for circumvention of the mandatory rules on maximum interest for late payment. The author proposes a solution to this dilemma. Firstly, it is accepted that cryptocurrencies are not "money" in the meaning of the Polish Civil Code. Therefore, the rules governing performance of monetary obligations do not automatically apply to cryptocurrencies. Secondly, cryptocurrencies cannot also be subject to all rules governing non-monetary performance, as this would lead to results inconsistent with the legislative purpose underlying various provisions of law. To ensure effectiveness of such provisions, a hybrid approach should be adopted. In particular, where justified by its ratio legis, the respective provisions governing monetary obligations should be applied to cryptocurrencies mutatis mutandi.
Artykuł otwiera dyskusję nad wykorzystaniem sieci blockchain w systemie finansowym oraz nad jego współczesną ewolucją. Systematyzuje informacje związane z tematyką rejestrów rozproszonych w finansach. Celem artykułu jest zwrócenie uwagi na możliwą zmianę kierunku w rozliczeniach między instytucjami finansowymi. Autor wykorzystał do analizy dostępną literaturę, artykuły naukowe, źródła internetowe dotyczące zastosowania technologii blockchain w finansach. Autor ma nadzieję, że dyskusja nad tym tematem rozpocznie cykl artykułów i analiz dotyczących sieci blockchain w systemie finansowym, a z czasem możliwa będzie implementacja tej technologii na skalę międzynarodową.
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This paper explores the potential role of DLT in securities markets, using the equity market as an example. The paper discusses potential benefits and costs, drawing out limitations and challenges in the adoption of the new technology, as well as regulatory considerations. Despite the heightened interest in DLT, the paper concludes that the likely path is incremental adoption of the technology rather than wholesale replacement of the existing infrastructure. An earlier version of this paper was presented at the 21st Melbourne Money and Finance Conference.