had to delegate control to others. finally, all records were kept on a form of distributed ledger called a blockchain, which has design features that promote transparency and are censorship - proof. no individual or government could destroy the records of trades or take ownership of the objects traded. with that history in mind and before we delve into the question of whether defi and centralized finance are substitutes or complements, i think it is useful to carefully define some terms. this will make sure we're all talking about the same things. as i described in a speech last year, i think of the crypto ecosystem as consisting of three parts : a crypto - asset, which generally refers to any digital object traded using cryptographic techniques ; technology that directly facilitates trading crypto - assets ; this includes smart contracts and tokenization ; 5 and a database management protocol used to record trades and ownership of assets, commonly referred to as the blockchain, which includes both permissioned and permissionless distributed ledger technologies. it is easy to see how the emergence of these technologies could lead one to think of defi as a substitute for centralized finance. for example, the technologies are allowing for individuals to trade assets without giving up control of those assets to an intermediary - a critical distinction with centralized finance. however, there are other uses emerging from these technologies that look more like complements to centralized finance. for example, distributed ledger technology, or dlt, may be an efficient and faster way to do recordkeeping in a 24 / 7 trading world. we already see several financial institutions experimenting with dlt for traditional repo trading that occurs 24 / 7. but before these ledgers can be used to facilitate transactions in traditional assets - like debt, equity, and real estate - these assets must be tokenized. undertaking the process to tokenize assets and use distributed ledgers like blockchain can speed up transfers of assets and take advantage of another innovation : smart contracts. rather than relying on each party to separately carry out the transaction, smart contracts can effectively combine multiple legs of a transaction into a single unified act executed by a smart contract. this can provide value as it can mitigate risks associated with settlement and counterparty risks by ensuring the buyer will not pay if the seller does not deliver. while these efforts are still in early stages, the functionality could expand to a broad set of financial activities. the bottom line is that things like dlt, 3 / 5 bis - central bankers'speeches token

financial system as a whole, and not just those to individual firms in isolation. implementing supervision in a way that seeks to identify systemic risks as well as risks to individual institutions is a difficult challenge, but the fact is that the traditional approach of focusing narrowly on individual firms did not succeed in preventing this crisis and likely would not succeed in the future. consequently, we at the federal reserve have been working with international colleagues to require that the most systemically critical firms increase their holdings of capital and liquidity and improve their risk management ; and we are overhauling our supervisory framework for the largest institutions, both to improve the effectiveness of consolidated supervision and to incorporate in our oversight a more comprehensive, systemic perspective. the second component of the strategy to end too - big - to - fail is to increase the resilience of the financial system itself, to reduce the potential damage from a systemic event like the failure of a major firm. for example, the federal reserve has been leading collaborative efforts to improve the clearing and settlement of credit default swaps and other derivatives and to enhance the stability of markets for repurchase agreements. limiting the fallout from the failure of a major firm is not only directly beneficial in a crisis, it also helps to reduce the too - big - to - fail problem, because the government has much less reason to intervene if it believes that the financial system is resilient enough to handle a significant failure without excessive disruption. third, because government oversight alone will never be sufficient to anticipate all risks, increasing market discipline is an essential piece of any strategy for combating too - big - to - fail. to create real market discipline for the largest firms, market participants must be convinced that if one of these firms is unable to meet its obligations, its shareholders, creditors, and counterparties will not be protected from losses by government action. to make such a threat credible, we need a new legal framework that will allow the government to wind down a failing, systemically critical firm without doing serious damage to the broader financial system. in other words, we need an alternative for resolving failing firms that is neither a disorderly bankruptcy nor a bailout. a prototype for such a framework already exists – namely, the rules set forth in the federal deposit insurance corporation improvement act of 1991 for dealing with a failing bank. as the fdic is now able to do with a failing bank, the government should, under appropriate circumstances and with appropriate safeguards, be able to seize and wind down a failing