christopher j waller : thoughts on the crypto ecosystem speech by mr christopher j waller, member of the board of governors of the federal reserve system, at the global interdependence center conference " digital money, decentralized finance, and the puzzle of crypto ", la jolla, california, 10 february 2023. * * * thanks to the conference organizers for inviting me to participate today. it is great to be back at a global interdependence center conference. given recent events in crypto, it is certainly timely to have a day of discussions related to digital assets. 1 before diving into today's talks, which will touch on various parts of the crypto ecosystem, i'd like to clearly define some concepts to ensure we're all talking about the same things. i think of the crypto ecosystem as consisting of three parts : a crypto - asset, which generally refers to any digital asset implemented using cryptographic techniques that is being traded ; a database management protocol used to record trades, commonly referred to as the blockchain, which includes both permissioned and permissionless distributed ledger technologies ; and technology that directly facilitates trading crypto - assets ; this includes smart contracts and tokenization as a form of data privacy. the latter two parts may facilitate the trading of crypto - assets, but also have much broader applications. first, let's consider distributed ledger technology. the technology is simply a database management protocol that has various permissions regarding who can write to the database and who can read the database. although this technology is fundamental for the creation of crypto - assets, there is nothing in this technology that restricts it to being used solely in the crypto ecosystem. in fact, distributed ledger technology is being explored to potentially address a wide range of data management problems. next, there are various technologies related to crypto - assets. one is the use of smart contracts in peer - to - peer trading. smart contracts also can be used in conjunction with a centralized data management protocol to automate the execution of certain transactions in non - crypto - assets. for example, over time, they could be used to speed up the clearance and settlement of securities transactions. another emerging technology is tokenization. in any trade of assets, there are issues regarding how much personal information you need to provide to conduct the trade. for example, some personal information is needed to protect against the possibility of anonymous trading, which can promote money laundering. tokenization

them as wished, to fit a specific investor ’ s risk profile. the emergence of derivatives, combined with the appropriate mathematical tools to price them, has greatly expanded the range of tradable risks, opening up new and vast horizons for hedging strategies. financial institutions are able to actively manage their exposures and reallocate certain risks to those players that are most able to bear them. overall, investors are more willing to invest across borders, knowing that they can reach an improved riskreturn trade - off. simultaneously, economies are becoming more open financially, especially in the emerging world. the growth of international capital flows is the consequence both of domestic policies and global factors. domestically, financial liberalisation and deregulation have relaxed investment restrictions. more flexible exchange rate policies, liberalisation of capital accounts, the opening of domestic stock markets to foreign investors as well as “ investor - friendly ” policies help to attract foreign investors. global factors have also played a role, with the abundant global liquidity environment as well as the decrease in home bias. by way of example, non - residents currently hold 46 % of french market capitalisation and slightly more than 50 % of french government bonds. a third driver is the emergence of global financial players, such as large banks, hedge funds, private equity funds and more recently sovereign wealth funds. they all share common characteristics : - they play an important role in fostering market efficiency, and provide liquidity to capital markets ; - they use sophisticated investment strategies ; - they implement advanced risk management practices, and help to spread them across markets and countries. however, because of their sheer size and potential impact on market equilibria, they raise some concerns of transparency as well as questions about their role in fostering, or not, financial stability. those issues warrant being debated. what are the consequences of the financial globalisation currently underway for global capital markets? they are well known, so i will just highlight two of them. first, globalisation increases the efficiency of financial markets. thanks to financial globalisation and technological progress, informational efficiency of capital markets has increased over the past few decades. any new available information is accurately processed and impounded in asset prices, leading to more accurate pricing of assets and risks. and the permanent quest for arbitrage opportunities has fostered crossmarket and cross - border strategies also leading to more consistent pricing. allocative efficiency, that is the market ’ s ability to allocate resources in a way that maxim