Liquidity providers (LPs) on decentralized exchanges (DEXs) can protect themselves from adverse selection risk by updating their positions more frequently. However, repositioning is costly, because LPs have to pay gas fees for each update. We analyze the causal relation between repositioning and liquidity concentration around the market price, using the entry of blockchain scaling solutions, Arbitrum and Polygon, as our instruments. Lower gas fees on scaling solutions allow LPs to update more frequently than on Ethereum. Our results demonstrate that higher repositioning intensity and precision lead to greater liquidity concentration, which benefits small trades by reducing their slippage.
The application of distributed ledger technology (DLT) in the financial sector has fostered the development of new services that are frequently referred to collectively as ‘decentralized finance’, or DeFi. In the wake of these recent developments many observers and practitioners regard DLT as a major technological disruption to the financial system, possibly leading to the complete disintermediation of banks and to their substitution with a network of bilateral relations between borrowers and lenders recorded in a common ledger. Recent historiography has shown that a potentially analogous system existed in Ancien Régime societies whereby finance was provided not only by specialized intermediaries, but also by an ‘informal’ credit network where debtors and creditors entered directly into relationship through notaries. In this paper, we carry out a systematic comparison between cryptolending, an extreme form of DeFi at the technological frontier, and the early system of peer-to-peer lending represented by notarized loans in the early modern period. Our aim is to assess the true novelty of current practices and to understand if, and in what sense, the technological innovation represented by DLT can effectively produce a structural change in the functioning of the financial system.
Abstract 157 This article discusses the regulatory definition of collective investment undertakings (CIUs) as provided for by Article 4 (1) (a) AIFMD and Article 1 (1) UCITSD in the context of traditional family offices, holding companies, and joint ventures, and distinguishes them from more recently observed digital asset pools such as digitally managed accounts, crypto lending, crypto staking, and decentralized autonomous organizations.Testing the legal definition of CIUs in the context of traditional and digital pooled investments allows not only for the delineation of the scope of AIFMD (and to a lesser extent, UCITSD), but also provides insights on the desirable content of Level 2 regulation under MiCA. While ESMA guidance based on many years of supervisory experience sets the limits on traditional use cases, the digital boundaries of collective investment schemes are largely untested and to some extent uncertain, resulting in high costs for legal advice, as demonstrated by our brief look into MiCA set out in this article. To address these matters, we argue in favor of broad default rules on pooled finance, paired with exemptive powers from individual or all rules where a disparity exists between the purpose of regulation and the regulated activities. If paired with carve-outs for applications below EUR 5 million (where retail investors are present) and EUR 100 million (sophisticated clients only), these default rules would assist supervisory authorities in setting adequate boundaries for investment fund regulation of innovative financial products. After the introduction (Pt. I), Pt. II outlines the legal definition(s) of CIUs; Pt. III discusses the regulatory limits in the context of traditional use cases; Pt. IV analyzes the limits for digitally managed accounts, decentralized autonomous organizations (DAOs), and decentralized finance as a whole (referred to collectively as “digital limits”); Pt. V presents our policy considerations; and Pt. VI concludes.
The decentralized advantage of block chain technology helps to improve the credit business model of commercial banks, and also provides an idea to solve the financing difficulties of SME.This paper compares the traditional bank credit model with the credit model embedded in block chain technology from a theoretical perspective, and analyzes the impact on block chain technology on the relationship among banks, enterprises and governments.The analysis shows that the credit model embedded in block chain technology can improve the information asymmetry between banks and enterprises and alleviate the problem of bank credit rationing; The credit platform based on block chain technology effectively solves the financing difficulties faced by small and medium enterprises.
Non-fungible tokens (NFTs) are used in numerous markets for collectibles, art, securities, and commodities. These are different markets, and there is no regulatory framework for all NFTs. To determine a proper legal regime, it is essential to locate the market to which an NFT belongs. This task requires a deep understanding of the economic realities of the associated rights, assets, and transactions. Economic-reality-based interpretations should provide a solid footing for better regulation of NFTs in the US and other jurisdictions grappling with NFT regulation. The new cryptoasset regime in the EU already incorporates a “substance over form” approach. In the US, courts have been successfully applying the Howey test to examine transactions and schemes and establish whether securities law should apply to cryptoassets. In 2023, the SEC and a US federal district court applied the Howey test to demonstrate why and how securities law built for legacy markets where mainstream assets are fungible could apply to transactions in non-fungible assets. The decisions are an example of establishing economic realities of transactions with novel assets regardless of the underlying technologies on which the assets are built. An economic reality approach should help courts and other policy-makers ascertain to which market an NFT belongs and which corresponding legal regime should govern.
Decentralized finance, powered by blockchain technology, is growing day by day. This field, which emerged a few years ago, today manages $70 billion in assets. In this study, the concept of decentralized finance is discussed and explained the differences from traditional finance. Then, compliance with the legal regulations and the requirements to ensure compliance are mentioned. An evaluation has been made about the financial services offered by the decentralized finance field and the stock market and stablecoins that it uses as a tool while providing these services. Its economic effects, security and, privacy dimensions are examined. In the study, the differences between centralized and decentralized finance, which generally covers legal, economic, security, privacy, and market manipulation, are systematically analyzed. A structured methodology is presented to distinguish between centralized and decentralized financial services.
Oracles are software components that enable data exchange between siloed blockchains and external environments, enhancing smart contract capabilities and platform interoperability.Oracles play key roles in decentralized finance and blockchain applications in centralized finance.We find that integration into decentralized oracle networks is positively associated with key measures of economic activity such as Total Value Locked, triggered by positive network effects in adoption and usage.Our study reveals symbiotic gains from enhanced interoperability and network effects across protocols on a given chain and among integrated chains.Oracle integration appears to improve risk-sharing and mitigates contagion, increasing resilience during turbulent periods in crypto markets.Overall, oracles emerge as a crucial component to enable informational and economic integration in decentralized finance ecosystems.
Central banks may shift their international reserve holdings in order to protect themselves ex-ante against the risk of financial sanctions by fiat reserve currency issuers. For example, from 2016 to 2021, countries facing a higher risk of US sanctions increased the gold share of their reserves more than countries facing a lower risk of US sanctions. This paper explores the potential for Bitcoin to serve as an alternative hedging asset. I describe a dynamic Bayesian copula model to simulate the joint returns of Bitcoin and other reserve assets under a wide range of plausible sanctions probabilities, quantifying the extent to which varying levels of sanctions risk increase optimal gold, renminbi, and Bitcoin allocations. I conclude that sanctions risk may diminish the appeal of US Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of both cryptocurrency and gold. • The paper simulates the returns of Bitcoin and other reserve assets. • The simulations balance expected return, volatility, and sanctions risk. • In the presence of sanctions, there is no completely safe asset. • The model shows that cryptocurrency can act as a form of insurance. • Sanctions risk may propel broader diversification in central bank reserves.
Pietro Saggese, Esther Segalla, Michael Sigmund, Burkhard Raunig · 6 authors
Entities like centralized cryptocurrency exchanges fall under the business category of virtual asset service providers (VASPs). As any other enterprise, they can become insolvent. VASPs enable the exchange, custody, and transfer of cryptoassets organized in wallets across distributed ledger technologies (DLTs). Despite the public availability of DLT transactions, the cryptoasset holdings of VASPs are not yet subject to systematic auditing procedures. In this paper, we propose an approach to assess the solvency of a VASP by cross-referencing data from three distinct sources: cryptoasset wallets, balance sheets from the commercial register, and data from supervisory entities. We investigate 24 VASPs registered with the Financial Market Authority in Austria and provide regulatory data insights such as who are the customers and where do they come from. Their yearly incoming and outgoing transaction volume amount to 2 billion EUR for around 1.8 million users. We describe what financial services they provide and find that they are most similar to traditional intermediaries such as brokers, money exchanges, and funds, rather than banks. Next, we empirically measure DLT transaction flows of four VASPs and compare their cryptoasset holdings to balance sheet entries. Data are consistent for two VASPs only. This enables us to identify gaps in the data collection and propose strategies to address them. We remark that any entity in charge of auditing requires proof that a VASP actually controls the funds associated with its on-chain wallets. It is also important to report fiat and cryptoasset and liability positions broken down by asset types at a reasonable frequency.
Michael Weber, Stephen Sheflin, Olivier Coibion, Yuriy Gorodnichenko
Using repeated large-scale surveys of U.S. households, we study the cryptocurrency investment decisions and motives of households relative to other financial assets.Cryptocurrency holders tend to be young, white, male and more libertarian relative to non-crypto holders.They expect much higher rates of returns for crypto and perceive it as relatively safer than do other households.They also view it as a better hedge against inflation.For those holding cryptocurrencies, changes in Bitcoin prices translate into their purchases of durable goods.Finally, exogenously-provided information about historical returns of cryptocurrencies leads individuals to increase their desired crypto holdings and makes them more likely to actually purchase cryptocurrency subsequently.We compare these views and behaviors to those of households toward other financial assets and argue that cryptocurrency is unique in many of these respects.
The long-lasting intermediated structure of international bond markets has come under scrutiny in recent times because of the risks it exposes final investors to, mostly in relation to the difficulties these investors face in enforcing their rights. Distributed ledger technologies (DLTs) have emerged as a strong contender in efforts to improve the position of final investors by shifting the market to a direct holding structure. In this context, it is necessary to ask if organising international bond markets under a DLT-based direct holding structure will effectively address the risks surrounding intermediated securities. Furthermore, it is important to assess the impact such a change is likely to have on other players in the market (including intermediaries and issuers), as well as on the financial system as a whole. With these questions in mind, this article begins with an explanation of the primary legal implication of holding intermediated securities, i.e., that final investors do not hold legal title over the bonds they have invested in because they are not engaged in a direct relationship with the issuer. The paper then proceeds to dissect the risks such arrangements expose investors to and contrast those risks with the benefits that intermediation afford to investors, issuers and the financial system in general. It is then argued that DLTs are not only inadequate to the task of addressing those risks, but would also eliminate most of the advantages of intermediation. The paper goes on to examine how investors and issuers are not incentivised to promote the development of a DLT-based bond market organised under a direct holding structure. It concludes with the suggestion that a better way to improve the position of final investors in bond markets is to explore how DLTs may enhance the benefits already created by intermediation, rather than relying on these technologies to eliminate intermediation altogether. In particular, it is submitted that DLTs may introduce efficiencies in the management of the bonds, the performance of obligations by issuers, the settlement process, the performance of securities financing transactions, and the provision of services by intermediaries.
This paper aims to analyse the literature on distributed ledger technology (DLT) and blockchain in the banking and financial industry. The use of these technologies has extended beyond the creation of private cryptocurrencies, and they are implemented in numerous areas. The methodology employed in this study consists in the review of the most relevant literature by focusing on theoretical and empirical studies as well as on the guidelines and surveys performed by national and international banking and financial authorities. This paper shows that the most promising uses of DLT in finance include: 1) application for specific banking activities; 2) application to improve the functioning of the supply chain finance; 3) creation of central bank digital currencies (CBDCs). Lastly, this paper detects avenues for future research in this field, which include the design of CBDCs, identification of the determinants of adoption of DLT, the use of the interventionist research to investigate into the organisational challenges of blockchain implementation in the banking industry. We contribute to the literature by providing a non-automated literature review and proposing a research agenda to advance our knowledge about the use of this technology in banking and finance.