Decentralised Finance, Regulation, and Systems Theory

Cryptocurrency has sparked expressions of concern from regulators – though sometimes coupled with expressions of interest in state-backed alternatives. This paradoxical situation neatly encapsulates the conundrum confronting regulators as they seek to come to terms with the new world opened up by blockchain and leading ultimately perhaps to decentralised finance. How do we best understand this confusing situation? This paper looks for answers by attempting to conceptualise the phenomenon of decentralised finance in autopoietic systems terms. Insofar as a plausible argument can be made for the proposition that finance represents an example of the internal differentiation of the economy, does decentralised finance in some sense constitute an intensified internal differentiation? Alternatively, and paradoxically, insofar as what we are concerned with is decentralised finance, does it instead in some sense represent an example of dedifferentiation? Answers to these questions will have relevance for efforts to regulate this emerging phenomenon. They will also help to shed light on whether state and central bank experiments in this space will produce positive effects or bring their own challenges.