Blockchain Papers

Authors unavailable

No abstract is available for this record.

Maggie Hu, Adrian D. Lee, Tālis J. Putniņš

No abstract is available for this record.

Bank for International Settlements, Raphael Auer, Stijn Claessens, Bank for International Settlements

Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.

Xingxiong Zhu

Abstract This paper elaborates on the blockchain-based identity authentication and intelligent credit reporting method. The technologies of multidimensional authentication, multifactor weighted score calculation, security threshold, distributed ledger, smart contract and encryption algorithm are proposed to realize dynamic identity security authentication and intelligent risk control. The user behaviour analysis system, real-time risk identification system and intelligent risk prevention system are constructed. The multidimensional credit data collection is realized through blockchain distributed nodes. The distributed ledger of credit reporting, intelligent pricing of assets and automatic credit rating of users are proposed. It realizes credit reporting system and service based on multidimensional data, distributed ledgers, and smart contracts.

John Taskinsoy

No abstract is available for this record.

Hanna Kołodziejczyk, Klaudia Jarno

This article deals with the emerging topic of stablecoins, which is an umbrella term used to refer to a stable cryptocurrency. The authors shall address a number of questions, namely: what are stablecoins; when are they used; what are the most common characteristics of stablecoins. The authors shall also present a taxonomy of stablecoins based on the mechanism employed to stabilize their value. A more thorough exploration of the market for stablecoins will follow, with particular attention given to the controversies surrounding the most popular of stablecoins – Tether.

Georg Keilbar, Yanfen Zhang

Abstract This paper aims to model the joint dynamics of cryptocurrencies in a nonstationary setting. In particular, we analyze the role of cointegration relationships within a large system of cryptocurrencies in a vector error correction model (VECM) framework. To enable analysis in a dynamic setting, we propose the COINtensity VECM, a nonlinear VECM specification accounting for a varying systemwide cointegration exposure. Our results show that cryptocurrencies are indeed cointegrated with a cointegration rank of four. We also find that all currencies are affected by these long term equilibrium relations. The nonlinearity in the error adjustment turned out to be stronger during the height of the cryptocurrency bubble. A simple statistical arbitrage trading strategy is proposed showing a great in-sample performance, whereas an out-of-sample analysis gives reason to treat the strategy with caution.

Rodney Garratt, Maarten R.C. van Oordt

We assess how the cost structure of cryptocurrency mining affects the response of miners to exchange rate fluctuations and the immutability of cryptocurrency ledgers that rely on proof-of-work. We show that the amount of mining power supplied to currencies that rely on specialized hardware, such as Bitcoin, responds less to adverse exchange rate shocks than other currencies respond to such shocks, a fact that is instrumental to avoiding double-spending attacks. The results may change if mining equipment used for one cryptocurrency can be transferred to another. For smaller currencies with low exchange rate correlation, transferability eliminates the protection that fixed costs provide. Our results weaken doomsday predictions for Bitcoin and other cryptocurrencies with declining block rewards. This paper was accepted by Bruno Biais, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4901 .

Ariah Klages‐Mundt, Dominik Harz, Lewis Gudgeon, Junyou Liu · 5 authors

Stablecoins are one of the most widely capitalized type of cryptocurrency. However, their risks vary significantly according to their design and are often poorly understood. We seek to provide a sound foundation for stablecoin theory, with a risk-based functional characterization of the economic structure of stablecoins. First, we match existing economic models to the disparate set of custodial systems. Next, we characterize the unique risks that emerge in non-custodial stablecoins and develop a model framework that unifies existing models from economics and computer science. We further discuss how this modeling framework is applicable to a wide array of cryptoeconomic systems, including cross-chain protocols, collateralized lending, and decentralized exchanges. These unique risks yield unanswered research questions that will form the crux of research in decentralized finance going forward.

Tarun Chitra, Alex Evans

As smart contract platforms autonomously manage billions of dollars of capital, quantifying the portfolio risk that investors engender in these systems is increasingly important. Recent work illustrates that Proof of Stake (PoS) is vulnerable to financial attacks arising from on-chain lending and has worse capital efficiency than Proof of Work (PoW) \cite{fanti_pos_econ}. Numerous methods for improving capital efficiency have been proposed that allow stakers to create fungible derivative claims on their staked assets. In this paper, we construct a unifying model for studying the security risks of these proposals. This model combines birth-death Pólya processes and risk models adapted from the credit derivatives literature to assess token inequality and return profiles. We find that there is a sharp transition between 'safe' and 'unsafe' derivative usage. Surprisingly, we find that contrary to \cite{fanti2019compounding} there exist conditions where derivatives can \emph{reduce} concentration of wealth in these networks. This model also applies to Decentralized Finance (DeFi) protocols where staked assets are used as insurance. Our theoretical results are validated using agent-based simulation.

Vijay Mohan

No abstract is available for this record.

Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro

No abstract is available for this record.

Dirk Andreas Zetzsche, Douglas W. Arner, Ross P. Buckley

The emergence of Decentralized Finance (DeFi) signifies a paradigm shift in the financial sector, introducing both unparalleled opportunities and multifaceted challenges. As DeFi continues to redefine traditional financial systems, it becomes vital for stakeholders to grasp the nuances underpinning this evolution, especially the roles of behavioral finance and public policy. This article presents a literature review on financial market regulation, examining the transformative potential of DeFi and its inherent risks, and explores the implications for regulatory frameworks based on behavioral finance. Public policy in the context of DeFi is a delicate balancing act. On one hand, there's the need to protect investors and ensure market integrity. On the other, there's the risk of over-regulating and stifling the very innovations that make DeFi transformative. Policymakers must grapple with these challenges, seeking ways to create regulatory frameworks that are both protective and adaptive. In addressing the question of how to sensibly regulate financial markets in the age of DeFi, the answer may be both straightforward and somewhat counterintuitive: Regulate peers. In a decentralized system where traditional service providers play a diminished role, peers or individual participants may take on functions that are analogous to those of traditional financial operators. Therefore, these peers may find themselves subject to financial market regulations, trade law, tax law, and other applicable statutes, depending on the services they provide, much like platform operators and their obligations.

Brian D. Feinstein, Kevin Werbach

ABSTRACT The meteoric growth of global cryptocurrency markets presents novel challenges to regulators. Some policymakers and scholars warn that regulation will cause trading activity to cross borders into less-regulated jurisdictions—or even smother a promising new financial asset class. Others believe regulatory actions will stimulate activity by providing clarity to market participants. Standing behind this disagreement is a debate about the desirability of either outcome. Some believe that governments should promote development of the cryptocurrency sector within their countries, while others view cryptocurrencies as conduits of illegality and fraud that should be restricted through strict regulation or even outright bans. Yet these debates have, to date, been conducted almost entirely without data concerning the effects of regulation on market activity. As a corrective, in this article we assembled original data on cryptocurrency regulations worldwide and used them to empirically examine movement in trading activity at a number of exchanges following key regulatory announcements. We found that a wide variety of models yielded almost entirely null results. From the creation of bespoke licensing regimes to targeted anti-money-laundering and anti-fraud enforcement actions, as well as many other categories of government activities, we found no systemic evidence that regulatory measures cause traders to flee, or enter into, the affected jurisdictions. These findings at last provide an empirical basis for regulatory decisions concerning cryptocurrency trading. Among other things, they call into question that capital flight or chilling effects should be a first-order concern.

Harsh Singh Chauhan, Jagjeet Jena

The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. This article highlights opportunities and potential risks of the DeFi ecosystem. I propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols.

A. A. Makurin

The stages of formation and theoretical background of cryptocurrency have been explored in the article. It has been established that the focus of the operation and use of such a specific financial asset is the protection of cash against the depreciation that occurs during political and economic fluctuations. But this is another kind of modern money, namely, stalk line. The main processes that have taken place in the IT field, which has influenced the further development of the monetary system worldwide have been reflected in the article. There is no unified system in the EU for cryptocurrency transactions. The technologies used to create any kind of cryptocurrency have been researched by the scientists of the advanced countries in the last century. Nowadays, modern blockchain technology is an improvement of the past. Each country has its own peculiarities and approaches to the recognition or non-recognition of cryptocurrency. The problem with the use of modern money is to determine the issuer. Cryptocurrency and electronic money have some things in common and distinctive. It has been determined that the use of cryptocurrency for the purposes of storing savings and payments is gaining popularity despite the problems of economic, tax and legal regulation. The market capitalization of bitcoin is compared with the leading economies of the world. Bitcoin capitalization is found to be higher than some countries' GDP. The basic aspects of cryptocurrency functioning are revealed. The main method of scientific research is the empirical method, which allowed to make several observations on the changing attitude of countries to cryptocurrency. The measurement process made it possible to understand the volume of the bitcoin market. As a result of scientific literature, cryptocurrency as electronic money is found to be a non-personalized payment instrument and is rotated outside the banking system electronically, which is why it implies that the state cannot control this process, which is why national banks of many countries with distrust treat that kind of money. The countries of the world, at their discretion, make changes in tax and legal law.

Reilly White, Yorgos Marinakis, Nazrul Islam, Steven T. Walsh

Cryptocurrencies such as Bitcoin have fascinated technologists and investors alike. They have become prevalent, with over 2,000 Bitcoin-like cryptocurrencies now in use. Most jurisdictions have not regulated cryptocurrencies. Whether existing regulations apply to cryptocurrency turns ultimately on if we classify cryptocurrencies as currencies, securities, or derivatives, or a money services (transfer) vehicle. In this set of exploratory analyses we seek to classify Bitcoin. We utilize a variety of methods to compare aspects of its behavior to: currencies, asset classes such as derivatives, technology-based products and possible technology-based products such as Ether and the security SPY, and speculative financial bubbles. We find that Bitcoin's behavior more closely resembles a technology-based product, an emerging asset class, or a bubble event, rather than a currency or a security; such that it is correct that existing currency and security laws should not apply to cryptocurrencies.

Peter Mell

In this work, we investigate how the governance features of a managed currency (e.g., a fiat currency) can be built into a cryptocurrency in order to leverage potential benefits found in the use of blockchain technology and smart contracts. The resulting managed cryptocurrency can increase transparency and integrity, while potentially enabling the emergence of novel monetary instruments. It has similarities to cash in that it enables the general public to immediately transfer funds to a recipient without intermediary systems being involved. However, our system is account-based, unlike circulating bank notes that are self-contained. Our design would allow one to satisfy know your customer laws and be subject to law enforcement actions following legal due process (e.g., account freezing and fund seizure), while mitigating counterparty risk with checks and balances. Funds can thus be transferred only between approved and authenticated users. Our system has on-chain governance capabilities using smart contracts deployed on a dedicated, permissioned blockchain that has different sets of control mechanisms for who can read data, write data, and publish blocks. To enable the governance features, only authorized identity proofed entities can submit transactions. To enable privacy, only the block publishers can read the blockchain; the publishers maintain dedicated nodes that provide access controlled partial visibility of the blockchain data. Being permissioned, we can use a simple consensus protocol with no transaction fees. A separate security layer prevents denial of service and a balance of power mechanism prevents any small group of entities from having undue control. While permissioned, we ensure that no one entity controls the blockchain data or block publishing capability through a voting system with publicly visible election outcomes.

Olanrewaju Isola Fatoki, Jedidah Wanjagi

ABSTRACT: The banking sector has undergone tremendous changes in the past decades. This paper seeks to investigate the future of Kenya banks by using cryptocurrency and blockchain technology to mitigate financial risk. A cryptocurrency performs the fundamental function of money, as a medium of exchange. The encryption and decentralization of digital currencies are the most important aspects regarding the applicability of Cryptocurrencies and Blockchain Technology in Kenya. Digital money supports individual investors as opposed to a dominant market player or authority. The fact that no single authority controls cryptocurrencies is the heart of its applicability in Kenya. Digital money is a unifying factor for the world markets defined by growing inequality and financial malpractices. The Kenyan banking system may take advantage of the smart contracts to address the myriad risks owed to the economic actions of the private and public parties. Banks can use the digital money to eliminate intermediaries that often constrain the capacity of the individual traders to enter into contracts. Cryptocurrencies operate on a user-to-user basis to enhance flexibility and control by the individual traders. The use of the technology can help the state to reduce the risk of loss owed to inaccurate authentication and valuation of assets. KEYWORDS: cryptocurrencies, blockchain technology, financial institutions, market risks, Kenia, banking system

Vincent Furrer, Klaus-Georg Deck

Zusammenfassung Dieser Beitrag stellt die Grundsätze von auf Smart Contracts und der Blockchain-Technologie basierenden Rating-Verfahren zur Bonitätsbewertung vor. Es werden die technologischen Grundlagen von Blockchain und Smart Contracts erläutert und diskutiert, inwieweit die Finanzbranche im Bereich des Ratings von dieser Technologie profitieren kann. Zunächst werden die Probleme traditioneller Ratingverfahren und deren Akteure thematisiert und anschließend Lösungsansätze aufgezeigt, um diese zu überwinden. Damit zeigt dieser außerhalb der traditionellen Bankdienstleistungen befindliche Anwendungsfall, dass mit der Blockchain-Technologie neue Potenziale für Geschäftsmodelle entstehen, die etablierte Prozesse grundlegend verändern und damit ein weiteres Mosaik zur Disruption der Finanzbranche darstellen können.

Sebastian Schich

Banks as a group have traditionally been considered “special” in the sense of meriting the full set of provisions of the financial safety net. The specific motivations for that view have evolved over time, although it owes more to a specific combination of economic functions performed as opposed to any particular function. These functions include offering transaction accounts redeemable in cash on demand, providing liquidity, and serving as conduits for payments and monetary policy transmission. Recent developments suggest however that almost all of the individual economic functions performed by banks can in fact be provided in unbundled form by Fintech initiatives, in some cases more rapidly, at lower fees, and via more streamlined digital interfaces. One important exception remains monetary policy transmission. For the performance of this function, policy makers and central bankers have reserved a privileged role for banks. A radical departure from the current fractional reserve system would be required to unbundle that function and separate money from the banking system, and some private cryptocurrencies have been proposed with the explicit intent to change the nature of money. So far, the present article concludes such initiatives remain marginal, so that banks as a group remain “special”. This observation owes much to the fact that central banks rely on the capacity of the banking system to create money and provide the economy with adequate liquidity and, despite occasional financial crises, have concluded that the efficiency of the current system outweighs the associated costs.

Bank of International Settlements, Raphael Auer

The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market's economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger's data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.

Carlos Rodrigues, Ana Campina, Graziela Meneghel de Moraes

The existence of cryptocurrency a decade ago is an inescapable reality that at the moment generates a high financial influence at global level, the fact that obliges us to know and to study them. Our questions are essentially at three levels: their acceptance, or not, by the States in the face of the paper-money issued by their Central Banks and how the Private Banks react to this virtual currency created in particular; what actions have Tax Administrations at the global level faced with the wealth they generate and the financial values that move in the real economy. Our study is based on the doctrine that already exists, but mainly financial reports produced by central banks and private banking as well as by tax administrations. Finally, we present our conclusions on the current state of analysis and financial studies of the banking system and tax administrations and, of course, our opinion. Keywords: Cryptocurrency, Bitcoin, fiscal analysis, policies, perceptions.

Nick Cowen

Purpose The purpose of this paper is to explore the possible contributions of blockchain technology to creating new governance structures that facilitate social cooperation. Design/methodology/approach Conceptual analysis with key ideas in new institutional economics and political theory is used in this paper. Findings Blockchain technology provides a new tool through which political entrepreneurs can credibly alienate some of their power within a system of rules that they have established. Originality/value This paper links discussion of blockchain entrepreneurship in commercial markets to research into private governance.