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School of Law

DeFi: Shadow Banking 2.0?

Date: 12 December 2022

The London Financial Regulation Seminar is an inter-collegiate and inter-disciplinary group of experts led by CCLS and our Institute of Banking and Finance under the leadership of Professor Lastra and Daniele d’Alvia.

On December 12, Professor Hilary J. Allen’s discussed her last research paper titled “DeFi: Shadow Banking 2.0?” forthcoming on William & Mary Law Review. Professor Rosa Lastra chaired the event and Professor Emilios Avgouleas was the discussant.


Decentralised finance (DeFi) is an entire ecosystem built on blockchain technology and that does not rely on a central authority. DeFi started as an intimidating sector, the domain of the tech-savvy. However, much has changed since then, and nowadays many platforms allow investors to easily connect their digital wallets, exchange their fiat, such as Euros and US dollars into cryptocurrency and access the yields available in DeFi with just a few taps. The overall value of assets deposited in DeFi transactions grew from $601 million at the beginning of 2020 to $239 billion in 2022, according to blockchain data provider Amberdata. The rise has been mainly led by institutional investors who have either recently joined or are strengthening their presence in DeFI.

The Global Financial Crisis (2007-2010) was characterised by a distribution of financial risks promoted through derivatives, securitizations, and money market mutual funds (Shadow Banking 1.0). Professor Allen claims that “if the DeFi is permitted to develop without any regulatory intervention, it will magnify the tendencies towards heightened leverage, rigidity, and runs that characterised Shadow Banking 1.0”.

Can DeFi be prevented from becoming the new Shadow Banking 2.0? Professor Allen enlightened us on how DeFi is irremediably destined to fail, and how the fascinating advances of technology are hiding ungovernable and unmanageable financial risks that might be one day able to act against the financial stability of the entire economic system as much as Shadow Banking 1.0 did.

About Professor Hilary J. Allen

Professor Hilary J. Allen is a Professor of Law and the Associate Dean for Scholarship at the American University of Washington College of Law. She teaches courses in Banking Law, Securities Regulation, and Business Associations.

Professor Allen is an internationally recognised expert on financial stability regulation and new financial technologies, and has been invited to share her research and expertise with organisations including the Federal Reserve Board, SEC, CFTC, FSOC, IMF, Bank of England, Australian Securities and Investments Commission, and Financial Stability Board. She has testified before the House Financial Services Committee and the Senate Banking Committee, and is the author of the book Driverless Finance: Fintech’s Impact on Financial Stability (2022, Oxford University Press). Professor Allen has authored twenty law review articles addressing issues ranging from financial agency structure, to agencies’ scientific/technological capacity, to financial stability threats stemming from climate change and fintech. She is regularly quoted in the popular press, and is actively involved in presenting scholarly publications at roundtables and conferences.

About Professor Emilios Avgouleas

Professor Emilios Avgouleas holds the (statutory) International Banking Law and Finance Chair at the University of Edinburgh and is the founding director of the Edinburgh LLM in International Banking Law and Finance. He currently serves as a member of the European Securities and Markets Group, the Stakeholder Group of the European Securities and Markets Authority (ESMA).

Emilios is a senior research fellow at Edinburgh University's blockchain lab and currently serves as a regular visiting Professor at the School of European Political Economy, Luiss Guido Carli. He is a fellow member of the academic board of the European Banking Institute (EBI) and research member/fellow of the European Corporate Governance Institute (ECGI) and a member of the Monetary Committee of the International Law Association (MOCOMILA). He is currently engaged by the World Economic Forum (WEF)/Davos to conduct research on Systemic Risk, Innovation, and Technology in the context of the Great Reset. He is also acting as a consultant as part of the research team for the European Parliament for the general area of EU financial stability, Bank Resolution, and post-Covid 19 NPLs.

This event was organised by Professor Rosa Maria Lastra (Sir John Lubbock Chair in Banking Law at the Centre for Commercial Law Studies – Queen Mary University of London).

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