Banks and financial institutions have been spending significant sums to explore potential applications of blockchain technology. The financial services industry is among those areas predicted to benefit the most from blockchain use in the years to come. This chapter investigates this prediction after providing a primer on blockchain. It analyses the potential of blockchain to increase efficiencies and to transform business processes in a number of areas within the industry such as the trade life-cycle of securities and of derivatives, payments, traditional financing arrangements, asset management, insurance and corporate governance. It also examines new currencies and cryptoassets, phenomena ultimately enabled by the use of blockchain technology.
Today’s economy is being transformed by digitisation, prompting central banks to seriously consider the issuance of central bank digital currencies (CBDCs’. In that context, many central banks are examining the relevant economic and political factors, as well as necessary regulatory reforms in order to weigh the benefits and disadvantages of issuing CBDCs. In addition to these factors, legal issues related to CBDCs and the possible need to adopt new legislation to address them, also deserve consideration. This chapter examines the legal characteristics of CBDCs by reference to the features of sovereign currencies and cryptocurrencies. It concludes that the issuance of CBDCs will require adapting national legal and regulatory frameworks, in order to ensure clarity around the status and legal characteristics of CBDCs.
This paper applies biomimetic engineering to the problem of permissionless Byzantine consensus and achieves results that surpass the prior state of the art by four orders of magnitude. It introduces a biologically inspired asymmetric Sybil-resistance mechanism, Proof-of-Balance, which can replace symmetric Proof-of-Work and Proof-of-Stake weighting schemes.
The biomimetic mechanism is incorporated into a permissionless blockchain protocol, Key Retroactivity Network Consensus (KRNC), which delivers ~40,000 times the security and speed of today's decentralized ledgers. KRNC allows the fiat money that the public already owns to be upgraded with cryptographic inflation protection, eliminating the problems inherent in bootstrapping new currencies like Bitcoin and Ethereum.
The paper includes two independently significant contributions to the literature. First, it replaces the non-structural axioms invoked in prior work with a new formal method for reasoning about trust, liveness, and safety from first principles. Second, it demonstrates how two previously overlooked exploits, book-prize attacks and pseudo-transfer attacks, collectively undermine the security guarantees of all prior permissionless ledgers.
E-cash has its merits comparing with other payment modes. However, there are two problems, which are how to achieve practical/complete tracing and how to achieve it in compact E-cash. First, the bank and the TTP (i.e., trusted third party) have different duties and powers in the reality. Therefore, double-spending tracing is bank's task, while unconditional tracing is TTP's task. In addition, it is desirable to provide lost-coin tracing before they are spent by anyone else. Second, compact E-cash is an efficient scheme, but tracing the coins from double-spender without TTP results in poor efficiency. To solve the problems, we present a compact E-cash scheme. For this purpose, we design an embedded structure of knowledge proof based on a new pseudorandom function and improve the computation complexity from O(k) to O(1). Double-spending tracing needs leaking dishonest users' secret knowledge, but preserving the anonymity of honest users needs zero-knowledge property, and our special knowledge proof achieves it with complete proofs. Moreover, the design is also useful for other applications, where both keeping zero-knowledge and leaking information are necessary.
Cryptocurrencies provide an important dimension of innovation to the evolution of the exchange medium we call money. There are now over 2,000 such currencies, and their potential and volume is growing. However, they will, collectively and in volume, create real problems for the monetary system of a country. Central banks, which are institutions tasked with providing monetary stability, are more essential than ever. Yet they will see their problems rise while the power of their traditional tools to control money supply and interest rates — such as reserve requirements and the discount rates — is declining. But the new digital technologies — such as distributed ledgers — and new approaches provide regulatory bodies also with new and potentially powerful tools. The task for central banks and policy makers is not to resist private digital currencies as troublesome irritants, but to create approaches to use, regulate, and incent them in shaping the macro-economic path of their economy. In the process, central banks will also issue their own digital currencies, and a small number of those will become global super-currencies.
For decades, changing technology and policy choices have worked to fragment securities markets, rendering them so dark that neither ownership nor real-time price of securities are generally visible to all parties multilaterally. The policies behind these developments are found in the US National Market System and the EU Market in Financial Instruments Directive, together with universal adoption of the indirect holding system, and have painted Western securities markets into a corner from which escape to full transparency has seemed either impossible or prohibitively expensive. Although the reader has a right to skepticism given the exaggerated promises surrounding blockchain in recent years, we demonstrate in this paper that distributed ledger technology (DLT) contains the potential to lead fragmented securities markets back to multilateral transparency.
Leading markets generally lack transparency in two ways that derive from their basic structure: multiple platforms on which trades in the same security are matched have separate bid/ask queues and are not consolidated in real time (fragmented pricing), and high-speed transfers of securities are enabled by placing ownership of the securities in financial institutions, preventing transparent ownership (depository or street name ownership). The distributed nature of DLT allows multiple copies of the same pricing queue to be held simultaneously by a large number of order-matching platforms, curing the problem of fragmented pricing. This same distributed nature of DLT would allow the issuers of securities to be nodes in a DLT network, returning control over securities ownership to those issuers and thus restoring transparent ownership through direct holding with the issuer.
A serious objection to DLT is that its latency is very high – with a Bitcoin blockchain transaction taking up to 10 minutes. To cure this, we first propose a private network without cumbersome proof-of-work cryptography and, second, introduce into our model the quickly evolving technology of “lightning networks”, which are advanced two-layer off-chain networks conducting high-speed transacting with only periodic memorialization in the permanent DLT network. This paper demonstrates against the background of existing securities trading and settlement that a DLT network could bring multilateral transparency and thus represent the next step in evolution for markets in their current configuration.
Distributed ledger technology, also known as the blockchain, is gaining traction globally. Blockchain offers a secure validation mechanism and decentralized mass collaboration. Cryptocurrencies make use of this technology as a new asset class for investors worldwide. Cryptocurrencies are being used by companies to raise capital via initial coin offerings (ICOs). The substantial inflow of unregulated capital into a transactional and transnational industry has aroused interest from not just investors, but also national securities and monetary regulatory agencies. In this paper, we review the Security and Exchange Commission’s initial statements and subsequent pronouncements on ICO’s to illustrate the potential problems with applying an older legal framework to an ever-evolving ecosystem. Recognizing the inability of enforcement within existing regulatory frameworks, we discuss the importance of regulation of the crypto asset class and internal collaboration between government agencies and developers in the establishment of an ecosystem that integrates investor protection and investments.
Libra is the first private cryptocurrency with the potential to change the worldwide payment and monetary system landscape. Due to the scale and reach provided by its affiliation with Facebook, the question will be not whether, but how, to regulate it. This short paper introduces the Libra project and analyses the potential responses open to regulators worldwide.
Proof-of-Storage (PoS) is a collective term for protocols that allow proving data integrity and availability. There exist several PoS schemes. While they differ in detailed specifications, their common primary advantage is eliminating the need for trust between storage providers and data owners. However, there does not exist a mechanism to provide self-emerging delivery of requests for proof of storage, commonly known as challenges.\n\nThis paper presents a decentralized system for PoS using self-emerging challenges built on smart contract in the Ethereum platform. Self-emerging challenges provide an automated mechanism for ensuring integrity and persistence of data at chosen time intervals. The design employs participating nodes in the Ethereum blockchain, commonly referred to as peers, to store and route challenges to storage providers. The peers are compensated for their service by their respective employers. Data owners are enabled to schedule the time of emergence of a challenge to storage providers. Upon a received challenge, storage providers prove the integrity and persistence of data by responding correctly to the challenge. The design builds on the existing work of decentralized self-emerging data systems over Ethereum blockchain networks. We show that this work can be utilized for PoS and solve the problems that the incorporation and adaptation of this work raises.\n\nWe evaluate the proposed system based on several factors. We investigate the security of the system based on the different attacks that the participants may execute for exploitation. Moreover, we evaluate the attractiveness of participating in the system based on the gained remuneration by peers and the positive reputation gained by storage providers for proving the integrity of their clients’ data. We also evaluate the expenses of data owners utilizing the proposed system based on the inherited costs of invoking smart contract functions in the Ethereum platform. Lastly, through analysis, we find that to minimize the total costs in the system, the number of employed peers should be restricted to one in each path. In other words, one peer to deliver a PoS challenge to the storage service provider. We show that this additionally improves the fairness of remuneration payout to peers and analyze how security is affected by always utilizing one peer in each path. We discover that this improves prevention against drop attacks, while it to some degree decreases the prevention of release-ahead attacks which we deem less critical. Through these analyses, we recognize that the benefits greatly outweigh the drawback, and we make a suggestion that data owners should select exactly one peer per path in their services.
This paper compares Initial Public Offerings (IPOs) and equity crowdfunding with Initial Coin Offerings (ICOs) and explores the corresponding risks and limitations of these different fundraising practices, with a view to analysing the extent to which the latter should be subject to the same regulatory framework as the former. After assessing the underlying principles and current regulatory framework for IPOs and equity crowdfunding, with a focus on Europe and the US, we investigate the possibility of applying existing financial regulations to ICOs. Drawing from the notion of “functional equivalence”, we contend that many ICOs share a sufficient number of similarities with traditional IPOs and equity crowdfunding, to be regulated in a similar manner. However, given the various attempts by token issuers to escape from the scope of securities laws by assigning a different function to their ICOs tokens, we argue that principle-based regulation based on an in-depth risk-analysis could be an effective way of addressing the regulation of ICOs, thereby moving from “functional equivalence” to “risk equivalence”. Finally, we explore the use of blockchain technology as a regulatory technology, incorporating specific rules and constraints into the technological fabric of an ICO, in order to ensure compliance with the fundamental principles of financial regulation.
Ingolf Gunnar Anton Pernice, Sebastian Henningsen, Roman Proskalovich, Martin Florian · 6 authors
The price volatility of cryptocurrencies is often cited as a major hindrance to their wide-scale adoption. Consequently, during the last two years, multiple so called stablecoins have surfaced---cryptocurrencies focused on maintaining stable exchange rates. In this paper, we systematically explore and analyze the stablecoin landscape. Based on a survey of 24 specific stablecoin projects, we go beyond individual coins for extracting general concepts and approaches. We combine our findings with learnings from classical monetary policy, resulting in a comprehensive taxonomy of cryptocurrency stabilization. We use our taxonomy to highlight the current state of development from different perspectives and show blank spots. For instance, while over 91% of projects promote 1-to-1 stabilization targets to external assets, monetary policy literature suggests that the smoothing of short term volatility is often a more sustainable alternative. Our taxonomy bridges computer science and economics, fostering the transfer of expertise. For example, we find that 38% of the reviewed projects use a combination of exchange rate targeting and specific stabilization techniques that can render them vulnerable to speculative economic attacks - an avoidable design flaw.
Panagiotis Chatzigiannis, Foteini Baldimtsi, Igor Griva, Jiasun Li
Abstract Mining is a central operation of all proof-of-work (PoW)-based cryptocurrencies. The vast majority of miners today participate in “mining pools” instead of “solo mining” in order to lower risk and achieve a more steady income. However, this rise of participation in mining pools negatively affects the decentralization levels of most cryptocurrencies. In this work, we look into mining pools from the point of view of a miner: We present an analytical model and implement a computational tool that allows miners to optimally distribute their computational power over multiple pools and PoW cryptocurrencies (i.e. build a mining portfolio), taking into account their risk aversion levels. Our tool allows miners to maximize their risk-adjusted earnings by diversifying across multiple mining pools. Our underlying techniques are drawn from both the areas of financial economy and computer science since we use computer science-based approaches (i.e. optimization techniques) to experimentally prove how parties (and in particular miners) interact with cryptocurrencies in a way of increasing their Sharpe ratio. To showcase our model, we run an experiment in Bitcoin historical data and demonstrate that a miner diversifying over multiple pools, as instructed by our model/tool, receives a higher overall Sharpe ratio (i.e. average excess reward over its standard deviation/volatility).
The proliferation of peer-to-peer virtual alternatives to traditional banknotes has raised concerns among policymakers about the future of traditional means of making payments and how it might affect monetary policy implementation and its effectiveness. This study provides a brief overview of the existing research in this area. It compares positions taken in the literature by authors on some of the key policy issues relevant for central banks when thinking about the issuance of digitalized legal tenders. We examine the implications of government issued digital alternatives to traditional currencies for monetary policy effectiveness, payments and settlements, and financial market stability. We also discuss recent advances in financial technology to improve the making of payments and settlements, which might help contribute to financial inclusion. At the same time, new technologies represent challenges for regulatory authorities, for instance related to efforts to contain anti-money laundering and prevent financing of terrorism. A number of authors argue that government issued digital currency is necessary to address the flaws in private crypto currencies, and to improve monetary policy effectiveness. Central banks have begun to analyze possible features of digitalized legal tenders, to better understand the policy considerations involved and effects these could have for interest rate transmission and financial markets, but there is no clear consensus on key modalities associated with digitalized legal tenders. Moreover, many central banks do not regard privately issued virtual currencies as a serious threat to traditional currencies. Given the ongoing debate, it is difficult to make firm predictions about the impact of central bank issued digital currencies on monetary policy transmission and financial markets at this point.
We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents.We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged.We apply the equivalence result to the "Chicago Plan,'' cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC).In particular, we show why CBDC need not undermine financial stability.
In this paper I discuss how blockchains potentially could affect the way credit risk is modeled, and how the improved trust and timing associated with blockchain-enabled real-time accounting could improve default prediction. To demonstrate the (quite substantial) effect the change would have on well-known credit risk measures, a simple case-study compares Z-scores and Merton distances to default computed using typical accounting data of today to the same risk measures computed under a hypothetical future blockchain regime.
Compared to initial public offerings (IPOs) that are sales of company ownerships, and loans that are sales of debt claims, initial coin offerings (ICOs) are sales of promises of cryptocurrency appreciation. However, regulatory uncertainties continue to prohibit successful widespread adoption. This paper examines ICOs with varying levels of success, including Mastercoin (now Omni) and Kin, as well as fraudulent ICOs, like REcoin and OneCoin. The discussion of the benefits and flaws within the ICO market examines regulatory challenges concerning risks transferred to investors through information asymmetry, while questioning the ability of regulations to enhance investor protection mechanisms without undermining the fundamental value of cryptocurrencies and ICOs as a viable funding structure.
Blockchain ilk defa 2009 yılında ortaya çıkan bir alt yapı teknolojisi olsa da finans dünyası tarafından keşfedilip araştırılmaya başlanması 2014 yılının ilk aylarını bulmuştur. Bugün gelinen noktada, mevcut ekonomik ve iş modellerini bozma gücüyle radikal bir inovasyon olduğunu ispatlamış, yeni ve heyecan verici bir teknoloji olduğu söylenebilir. Finans sektöründen enerji piyasalarına, tedarik zinciri süreçlerine, fikri mülkiyet yönetimine, kamu sektörüne ve bunlar gibi çok çeşitli alanlara verimlilik artışı sağlama potansiyeline sahiptir. Blockchain teknolojisi sağladığı tam otomatik, şeffaf, güvenli ve minimum aracı alt yapısı ile pek çok sektörün ve devletin ilgisini çekmektedir. Yapılan bu çalışmada Blockchain’in taşıdığı potansiyelin daha iyi anlaşılabilmesi için uygulama alanlarına genel bir bakış ile Türkiye’nin bu teknolojiye olan yaklaşımı incelenmiştir. Çalışmada ek olarak Türkiye’deki emeklilik yatırım fon piyasasının işleyişinde kullanılacak özel bir Blockchain ağ yapısı tavsiye edilmiştir. Yapılan araştırma ve incelemeler sonucunda Blockchain kullanımının pek çok sektör için avantajlı, hatta on sene içerisinde hayati öneme sahip olacağı söylenebilir.
Weaknesses in investor control over their investments and in warehousing systemic risk in modern Financial Market Infrastructure (FMI) are the result of a combination of market failures and of structural flaws deeply ingrained in modern financial markets. Yet the utility of complex FMI comprising long custodial chains and large global Central Counterparties (CCPs) for the operation of modern markets is not seriously disputed. The change in the technology paradigm with the introduction of DLT systems for securities and derivatives FMI can increase investor control, the efficiency of risk management and, to some extent, augment the distribution of systemic risk. It can thus create a more diverse and resilient financial ecosystem. This cross-disciplinary paper identifies a multitude of reasons that favour a paradigm shift in FMI technology. It also sketches a comprehensive blockchain-based framework for the development of permission-based platforms for derivatives clearing and settlement and the handling of liquidity shortages within DLT systems. Arguably, the impact of technological change should lead to a reduction of industry rents for the benefit of end investors and of the end users of finance (entrepreneurs and businesses) enhancing market welfare. Therefore, the use of blockchain technology in FMI can transform the structure and future direction of the financial services industry as a whole.
High-tech enables payment evolution and global competition. The ambiguities surrounding of the digital currency still leave enough space for the analysis of its unreserved acceptance, trust and anticipation, which are the main driver for the spread of the network. Banks should carefully consider the technology underlying these cryptocurrencies as a potential generic new way of transferring ownership of the value over the long term. The chapter provides an analysis of the use of cryptocurrencies in general, especially Bitcoin as the technology adoption in the presence of network externalities. The objective attitude is the future of the digital currency in the moment is still unsolved issue due to the existence of “critical mass”. Further, the chapter explores financial privacy which is very sensitive issue in using digital currency (or cryptocurrency) and discuss about private choices versus political rules. The research has shown that the future of cryptocurrencies can be bright if some institutional-formal conditions are met due to the fact that success evolution of e-money requires building safety payments through three criteria–standardization, compatibility and innovation.
It is argued here that because a cryptocurrency has no intrinsic value, problems relating to day-to-day valuation and pricing arise. It is shown how these lead to the reversal of the conventional relationship between supply and demand and the susceptibility of the cryptocurrency markets to irrationality and speculative bubbles arising from the herding instinct. Also, as the cryptocurrency markets are largely free of regulation and the desire for privacy by founders, owners and developers is so great, accountability and disclosure requirements are either minimal or non-existent, leading to the manipulation of cryptocurrency prices, volume and market capitalisation information. Another consequence of their freedom from regulation, particularly surprising given the importance placed on their security through the use of blockchain, is the magnitude of thefts of cryptocurrency (both in terms of frequency and size) levels of which would neither be expected nor tolerated in regulated financial markets.
Günümüzde teknolojinin hızla gelişmesi hayatımıza birçok alanda yenilik getirmeye başlamıştır. Özellikle finansal açıdan yenilikler hayatımızı direkt olarak etkilemektedir. Yapılan mal veya hizmet harcamaları internet üzerinden yapılmaya başlanmış olması geleneksel ödeme yöntemlerini değişikliğe uğratmış ve elektronik ödeme yöntemlerini hayatımıza sokmuştur. Bununla beraber geleneksel paralar evrimleşerek sanal paralara dönüşmüştür. Sanal para olgusu 2009 yılında Nakamoto isimli kimliği henüz belli olmayan kişi ya da kuruluş tarafından çıkarılmış bitcoin isimli bir para birimi ile hayatımıza girmiş olup günümüzde popülerliğini arttırarak devam etmektedir. Blok zinciri teknolojisine sahip olan bu para birimi tamamen sanal olarak ve herhangi bir kuruluşa bağlı olmaksızın tarafların birbirine para transferleri yapmalarına imkân tanımaktadır. Bu para birimi devletlerce çıkarılmadığından dolayı para arzı, madencilik denilen bir süreç ile çıkmakta olup bir kişi ya da kuruluş fark etmeksizin gerekli donanım ve yazılım ile isteyen herkes bu para biriminin arzını sağlamaktadır. Herhangi bir kuruluşa bağlı olmadığı için de devletler bu paralar ile alakalı düzenlemeler getirmeye ve bazı ülkeler kontrolleri dışı geliştiğinden dolayı bu para birimini kullanımı yasaklamaya çalışmaktadır. Bu bağlamda, bu çalışmada finansal yenilikler ele alınmış özellikle elektronik ödeme yöntemleri ve sanal para olarak bitcoin üzerinde durulmuştur. Çalışmada konu ile ilgili literatür taranmış olup, sanal para kavramı açıklanmış, bu paranın kullandığı günümüzün en yeni teknolojisi olan blok zinciri ele alınmış, sanal para madenciliği ve bu paraya getirilen eleştiriler açıklanmıştır. Sonuç olarak hızla gelişen teknolojiye karşı koyulamayacağı için finansal açıdan değişikliklere hızlı cevap verilmesi ve bu yeniliklerden doğan avantaj ve dezavantajlar iyi belirlenmelidir.