Clearing institutions facilitate the settlement of financial transactions between parties. These entities act as intermediaries, confirming, matching, and guaranteeing transactions to reduce counterparty risk in financial markets. In traditional finance, they ensure the orderly completion of trades, assuming the risk of default by either buyer or seller. Their role is central to maintaining market stability and efficiency.
Context
The emergence of decentralized finance (DeFi) and blockchain technology challenges the traditional role of clearing institutions, as smart contracts can automate many functions. Debates exist regarding how existing clearing mechanisms can adapt to or incorporate digital assets, or if new, blockchain-native clearing solutions will become dominant. Regulatory bodies are examining how to apply oversight to these evolving clearing functions in the digital asset space.
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