ABSTRACT. Decentralized Finance (DeFi) represents a recent method of managing money with the help of blockchain, and it allows rapid, transparent and bank free transactions. This paper examines how DeFi may enhance government payments, including wages and welfare, of the population. In the research, the benefits, challenge, and regulatory requirements of DeFi are reviewed to determine if it can be used by the government. A poll of 52 individuals revealed deep awareness of DeFi with 77 percent aware of what it is. The vast majority of the respondents (73%) are certain that DeFi can help to make the issue of paying people to the state more efficient, and 65% of participants are sure that it can prevent corruption due to the bigger transparency. Nonetheless, 52 percent view the DeFi as risky since they perceive it as volatile and having security vulnerabilities. This survey also indicated that there was a heavy desire to regulation, where 79 percent of all people were in favor of a special framework that would allow safe use in the public systems. The respondents are skeptical amid the readiness of the government to implement DeFi due to technical and training gaps (56 percent). The research contrasts the DeFi to the Central Bank Digital Currencies, observing the superior speed of the DeFi and its deprivation of control. There is evidence that DeFi may save money and enhance services, particularly in localities where the banking system is poor. Nevertheless, such risks as hacks and ambiguous laws should be taken care of. The study suggests that governments should be educated on the effective use of DeFi by implementing precise rules, improved technology and educational opportunities. Among other research, it also demands further research on intertwining DeFi with other existing systems to develop secured and inclusive payment systems. This paper raises the potential of DeFi as an innovation promise in the public sector and points out that eliminating obstacles to safe and feasible use is critical.

Keywords: decentralized finance; public sector payments; blockchain technology; smart contracts; financial transparency; regulatory framework; Central Bank Digital Currencies

How to cite: Szydło, J., Stamule, S., & Pârvu, I.-A. (2023). “Decentralized Finance and the Future of Public Sector Payments: A Policy Review,” Smart Governance 2(1): 52–66. doi: 10.22381/sg2120234.

Received 11 January 2023 • Received in revised form 17 March 2023
Accepted 21 March 2023 • Available online 28 March 2023