Cryptocurrencies have made the headlines in mainstream news in the recent years. There are people who become rich in a matter of a few weeks as well as those who lose a fortune with Cryptocurrency. High Cryptocurrency price volatility has been witnessed as influential people and governments take turns fueling both the ups and downs. Prices rise when influential investors or persons express support for Cryptocurrencies while prices fall sharply when there are news regarding Cryptocurrency frauds and scams. Governments everywhere are still trying to find the right balance between control and leniency of Cryptocurrency adoption despite its long years of existence. In this paper, we attempt to develop a simple theoretical model to study the rational bubbles in the Cryptocurrency. In the model, two highlighted features of the Cryptocurrency are (1) an asset with fixed positive supply and (2) an asset traded internationally with infinitesimal transaction cost. We strikingly find that oscillatory bubbly equilibrium dynamic is common over a wide range of parametrization; for example, large income inequality across countries. In other words, the Cryptocurrency is highly volatile by its very own nature. Cryptocurrencies may increase welfare for agents in economies with certain parameters such as those with low relative risk aversion or high output elasticity of capital. It is a vector that can easily transfer shocks from one country to another through means of its price change alone or through means of propagated risk perception. We found an interesting insight that differentiates Cryptocurrencies from normal country restricted bubbles. When a shock happens to a Cryptocurrency anywhere, no matter how small or insignificant the economy of the source of the shock may be, a larger impact can ripple through other economies which are much bigger than the source country. This characteristic makes Cryptocurrencies either a hero or villain depending on the different parameters of the world and each economy.
We consider an economy endowed with two rival currencies: Dollar and Bitcoin, both of which inherently carry no value at all. While the Dollar is maintained by the U.S. Fed with target inflation, the supply in Bitcoin tapers to zero over time. We present a model with underlying pricing equations that a submartingale prevails on Bitcoin prices. Hence, Bitcoin prices appreciate over time. Absence of mutual impatience in Dollars leads to Bitcoin speculation. The main source of Bitcoin appreciation comes from the high inflation in Dollar over that in Bitcoin. We also show Bitcoin speculation and equilibrium to Bitcoin persistence over competing with Dollars.
The paper examines the concept of tokenizing assets on public permissionless blockchains such as Ethereum, Algorand or Avalanche. It starts with an overview of the core principles and components of public blockchains, such as the ownership attribution and efficient transaction processing. The paper argues that tokenization could simplify and streamline back-office operations, enable new interactions between issuers, financial firms and investors, and allow novel service models in digital asset issuance and management. The paper then examines the functions and potential usage of tokens, comparing and contrasting traditional and digital assets. It also discusses the mechanisms for token issuance and potential issues that may arise from tokenizing existing assets. The challenges and advantages of digital assets for implementing traditional asset functions such as dividend payments, shareholder voting, and shareholder communications are also discussed. Finally, the paper covers the usage of tokenized assets and the potential effects of smart contract services on existing financial service providers. The paper suggests several best practices and requirements for token issuance, including a token registry, standards for backed or asset-linked tokens, and a failsafe reconciliation process if the blockchain fails.
A cryptocurrency is designed to be a currency, but it does not really function like a currency. Currency always has an issuer, usually a trusted entity like the sovereign. There are already indications that cross-border flows are taking place in cryptocurrencies. If this trend is regulated, a part of the flows related to trade payments, remittances or cross border investments would be made in these cryptocurrencies. Cryptocurrencies have specifically been developed to ignore the regulated financial system. These should be reason enough to treat them with caution. It is also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value; that they are akin to Ponzi Schemes, and may even be worse. These should be reason enough to keep them away from the formal financial system. More significantly, they can destabilise the currency system, the monetary authority, the banking system, and in general Government’s ability to control the economy.
Digital money era is in full swing. It has already changed the structure of the global monetary system. Like industrial revolutions of the past few centuries, the digital money revolution is based on: (i) new IT and accounting technology (crypto algorithms, distributed ledger technology, internet, and deep penetration of smart phones), and (ii) demand for greater financial inclusion, and for more efficient financial services. The advent of unregulated private mobile money with more than 4 billion users and trillions of dollars in financial transaction has awakened fears of monetary system instability and dwindling traction of the old monetary and fiscal policy. The response has been a relentless effort by more than 100 central banks around the world to develop a public digital currency. Retail CBDCs issued by central banks will be available to everybody to provide stability and liquidity to the financial system in times of need. There will be uncertainties and challenges regarding the conduct of monetary and fiscal policy. Many expected improvements will come with inevitable tradeoffs in the speed and effectiveness of monetary policy transmission, and in achieving greater fiscal transparency without violating individual rights and privacy. Serbia will benefit greatly from improved fiscal transparency and reduced shadow economy associated with digital money revolution. At the same time it will be vulnerable to currency substitution pressures from future digital Euro and reduced traction of monetary policy in the presence of multiple e-money flows. Timely legal preparations for bank-led mobile money and Central Bank digital cash, and applied research of complex future policy risks is strongly advised.
Decentralized finance (Defi) has the potential to be one of the most significant advances in the burgeoning digital economy. It can change financial intermediation, and its applications have the potential to democratize finance by providing a comparable level of competition among economic service and product suppliers. It aims to change the present centralized global financial infrastructure by proposing an internet-based decentralized approach based on open-source protocols rather than traditional financial mediators. Defi applications aim to provide traditional financial services, also known as Centralized Finance, in complete epicondyles, global, and transparent manner by embracing the vision of a financial system that operates without any conduits, such as banks, insurance companies, or financial institutions and is solely powered by the power of smart contracts. Defi is anticipated to have a substantial influence on how banks function in the future, with the potential to modify the structure of the whole financial system on a global scale. We will explore how it will disrupt society and the economy.
Abstract This article examines the relationship between Bitcoin volume and term deposit investments in Mexico, Indonesia, Nigeria, and Turkey (MINT) from 2016 to 2021. We run cointegration and error-correction econometric models for each country, analyzing both the long-term and short-term interactions between Bitcoin volume and time deposits. Our findings indicate a negative association between Bitcoin volume and term deposits in all the MINT countries, except Mexico. This suggests that individual investors in economically and financially unstable nations are increasingly turning to Bitcoin as an alternative investment option. The observed effects, while currently modest, highlight the potential threats posed by decentralized cryptocurrencies to the monetary systems of emerging economies, impacting the stability of the banking industry and overall economic growth.
Henri B. Meier, John E. Marthinsen, Pascal Gantenbein, Samuel S. Weber
Abstract The value chains of Switzerland’s incumbent market players, such as banks and insurance companies, will be increasingly challenged by new technologies and competitors like FinTech, InsurTech, and RegTech firms. Digitalization, artificial intelligence, big data, machine learning, smart contracts, data analytics, distributed ledger technologies, robotics, biometrics, and gamification are just a few ingredients spurring the FinTech revolution and breaking up existing value chains. These developments will fuel the consolidation of processes and collaborations with third parties and shift the boundaries between financial services providers. To support new business models in banking and insurance, the Swiss finance sector has invested in its infrastructure to trade digital assets. It has also been one of the very few early movers globally in providing a comprehensive and solid DLT regulation.
This paper examines the impact of Bitcoin futures introduction on the crash risk of spot Bitcoin prices. Using both time-series regression with a time dummy and a difference-in-differences (DID) framework, we find that crash risk, proxied by the negative conditional skewness (NCSKEW) and down-to-up volatility (DUVOL) of 5-minute intraday Bitcoin returns, declines significantly after the launch of Bitcoin futures. Robustness checks confirm that the findings are robust to changes in control variables, control cryptocurrencies, the sampling frequency for high-frequency returns, and an extended post-introduction period. Furthermore, we explore the moderating roles of market liquidity and investor attention. The crash-mitigating effect of Bitcoin futures is significantly more pronounced in periods of low liquidity and limited investor attention, suggesting that futures markets play a stronger role in enhancing information efficiency under such conditions.HighlightsThis paper examines whether Bitcoin futures introduction increases or decreases Bitcoin price crash risk.The price crash risk of Bitcoin, measured by NCSKEW and DUVOL from high-frequency intraday data, decreases significantly after futures introduction.The main findings are robust to changes in control variables, control cryptocurrencies, the sampling frequency for high-frequency returns, and an extended post-introduction period.The crash-mitigating effect is more pronounced in periods of low liquidity and limited investor attention.
Abstract The new EU Markets in Crypto-Assets Regulation (“MiCA”) emphasises the prevention of market abuse as one of its five main objectives. This paper critically analyzes MiCA’s provisions on market abuse (Title VI), applying the new rules to the primary categories of crypto-asset market integrity risks to provide a coherent interpretation. In doing so, we consider both the pre-existing legal framework for protecting market integrity, chiefly the Market Abuse Regulation (“MAR”), and the unique features of crypto-asset markets. We find that by largely replicating MAR, MiCA presents “new wine in old bottles” challenges, as crypto-assets introduce novel issues that the legislator attempts to address with a subset of existing tools. The extent to which “decentralized finance” (DeFi) activities will incur liability under MiCA’s anti-market abuse provisions remains unclear, particularly regarding various blockchain network participants. Furthermore, classifying MEV strategies as market abuse may prove difficult. The absence of certain safe-harbor provisions present in MAR, such as those for self-insiders and buy-back and stabilisation schemes, may create uncertainty and potentially chill legitimate market behavior under MiCA.