A new type of Automated Market Makers (AMMs) powered by Blockchain technology keep liquidity on-chain and offer transparent price mechanisms. This innovation is a significant step in the direction of building a more transparent and efficient financial market. This paper explores analytically market mechanisms and shows the conditions when those mechanisms are equivalent. Furthermore, we show that AMM mechanisms inherently create loses for market makers from inefficient prices (dictated by the AMM solutions), however, these mechanisms work well for assets with low volatility. We further analytically explore the losses and quantify them. The paper ends by discussing the design of efficient decentralized exchange compared to traditional Central Limited Order Books (CLOBs) and highlights the former's potential regarding decentralized finance.
Blockchain Technology can enhance the basic services that are essential in traditional finance and it has the potential to become the foundation for decentralized business models, empowering entrepreneurs and innovators with all the right tools. By means of a trustless and distributed infrastructure, blockchain technology is optimizing transactional costs and allows the rise of decentralized, innovative, interoperable, borderless and transparent applications which facilitate open access and encourage permissionless innovations. DeFi stands for "Decentralized Finance" and refers to the ecosystem comprised of financial applications that are being developed on top of blockchain and distributed ledger systems. The Decentralized Finance (DeFi) or Open Finance movement takes that promise a step further. Imagine a global, open alternative to every financial service you use today - savings, loans, trading, insurance and many others - accessible to anyone in the world only by means of a smartphone and internet connection.
Abstract From a modern institutional economics viewpoint, blockchain is an institutional technology that minimizes transaction costs and greatly reduces intermediation. Through an analysis of blockchain, I demonstrate the possibilities of extended institutional approach â a new generation of complexity-focused methodologies and theories of institutional analysis that complement and expand the standard institutional paradigm. By using the theory of transaction value, I argue blockchain technologies not only will lead to a significant reduction in transaction costs but will also reorient intermediaries toward improving the quality of transactions and expanding the offer of additional transaction services. The theory of institutional assemblages indicates it is impossible to form a homogeneous system of blockchain-based institutions associated exclusively with the principles of decentralization, transparency, and openness. Blockchain-based institutions will be of a hybrid and conflicting nature, combining elements of opposing institutional logics â regulatory and algorithmic law, Ricardian and smart contracts, private and public systems, and uncontrollability and arbitration.
We coin the term *Protocols for Loanable Funds (PLFs)* to refer to protocols\nwhich establish distributed ledger-based markets for loanable funds. PLFs are\nemerging as one of the main applications within Decentralized Finance (DeFi),\nand use smart contract code to facilitate the intermediation of loanable funds.\nIn doing so, these protocols allow agents to borrow and save programmatically.\nWithin these protocols, interest rate mechanisms seek to equilibrate the supply\nand demand for funds. In this paper, we review the methodologies used to set\ninterest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We\nprovide an empirical examination of how these interest rate rules have behaved\nsince their inception in response to differing degrees of liquidity. We then\ninvestigate the market efficiency and inter-connectedness between multiple\nprotocols, examining first whether Uncovered Interest Parity holds within a\nparticular protocol and second whether the interest rates for a particular\ntoken market show dependence across protocols, developing a Vector Error\nCorrection Model for the dynamics.\n
Purpose The paper explores the precarious balance between modernizing monetary systems by means of digital currencies (either issued by the central bank itself or independently) and safeguarding financial stability as also ensured by tangible payment (and saving) instruments like paper money. Design/methodology/approach Which aspects of modern payment systems could contribute to improve the way of functioning of today's globalized economy? And, which might even threaten the above-mentioned instable equilibrium? This survey paper aims, precisely, at giving some preliminary answers to a complex â therefore, ongoing â debate at scientific as well as banking and political levels. Findings The coexistence of State's money (i.e. âlegal tenderâ) and cryptocurrencies can have a disciplining effect on central banks. Nevertheless, there are still high risks connected to the introduction of central bank digital currency, which should be by far not considered to be a perfect substitute of current cash. At the same time, cryptocurrencies issued by central banks might be exposed to the drawbacks of cryptocurrencies without benefiting from correspondingly strong advantages. A well-governed two-tier system to be achieved through innovation in payment infrastructures might be, in turn, more preferable. Regulated competition by new players combined with âtraditionalâ deposits and central bank elements remains essential, although central banks should embrace the technologies underlying cryptocurrencies, because risk payment service providers could move to other currency areas considered to be more appealing for buyers and sellers. Research limitations/implications We do not see specific limitations besides the fact that the following is for sure a broad field of scientific research to be covered, which is at the same time at the origin of ongoing developments and findings. Originality and implications of the paper are, instead, not only represented by its conclusions (which highlight the role of traditional payment instruments and stress why the concept of âmoneyâ still has to have specific features) but also by its approach of recent literature's review combined with equally strong logical-analytical insights. Practical implications In the light of these considerations, even the role of traditional payment systems like paper money is by far not outdated or cannot be â at this point, at least â replaced by central bank digital currencies (whose features based on dematerialization despite being issued and guaranteed by a public authority are very different). Social implications No matter which form it might assume is what differentiates economic from barter transactions. This conclusion is by far not tautological or self-evident since the notion of money has historically been a great object of scientific discussion. In the light of increasingly modern payment instruments, there is no question that money and the effectiveness of related monetary policies have to be also explored from a social perspective according to different monetary scenarios, ranging from central bank digital currencies to private currencies and cash restrictions/abolition. Originality/value The originality/value of the following article is represented by the fact that it (1) refers to some of the most relevant and recent contributions to this research field, (2) moves from payment systems in general to their newest trends like cryptocurrencies, cash restrictions (or, even, abolition proposals) and monetary policy while (3) combining all elements to reach a common picture. The paper aims at being a comprehensive contribution dealing with "money" in its broadest but also newest sense.
Philipp Schuster, Erik Theissen, Marliese UhrigâHomburg
The blockchain technology was first implemented in 2009 as the basis of the cryptocurrency Bitcoin. The technology is said to be a disruptive technology that has the potential to significantly affect many areas of the economy. In this paper we provide a survey of the blockchain technology and its applications in finance. We focus on cryptocurrencies, smart contracts, initial coin offerings, the clearing and settlement of transactions in financial markets, and implications for the governance of exchange-listed firms.
Nowadays the global financial system faces a triple challenge: the threat of a new systemic financial crisis at both global and regional levels; difficulties of constant adaptation of existing financial business and regulatory practices to intensive technological innovations; direct and hidden consequences of excessive political influence on the financial system through sanctions and selectively applied practices for sanction purposes. Improving the quality of financial regulation will require deeper cooperation between regulators of leading economies and a proactive position of the financial industry, as well as the decentralization of financial regulation. However, it is unlikely that this will happen at the global level. Financial stability became a key goal of global financial regulation in the post-crisis period. We consider financial stability as the «tragedy of commons». The article describes the main trends of financial markets regulation after the crisis: transformation of global financial architecture, anti-money laundering and counter-terrorism financing practices (AML/ CT), financial sanctions. The article analyzes the existing failures of modern post-crisis financial regulation: credit crunch, reduction in the effectiveness of monetary policy, regulatory arbitrage, and increased compliance costs (AML/CT legislation, tax legislation, and the sanctions regime). In the future we expect simultaneous trends of harmonization and standardization of requirements in traditional sectors of financial markets (including traditional institutions of the shadow banking sector), but at the same time regulatory arbitrage1 will induce new financial technologies in order to reduce regulatory costs. The crisis triggered by the coronavirus pandemic in 2020 despite its non-financial nature will almost inevitably have a major impact on financial markets and their regulation. Possible steps to eliminate failures in the financial regulation system are proposed, including recommendations for international organizations.
Open access
Banking stability, regulation, efficiency
Economic Issues in Ukraine
Economic, Social, and Public Health Issues in Russia and Globally
Ahmad Shauqi Haji Mohamad Zubir, Nur Aishah Awi, Azwadi Ali, Safiek Mokhlis · 5 authors
Cryptocurrency technology is considered as smart technology that would transform our way of doing business in the near future. Its unique features are said to be far superior than our existing business technology which mainly based on cash and credit, especially in time, security and cost. Nevertheless, its entrance into the business arena has also turns our existing systems of financial reporting and taxing upside down as both systems were moulded, formulated and evolved just to suit the systems of cash and credit. Therefore, the financial regulators and inland revenue boards should come out with a new system that can properly and fairly adapt to the technology of cryptocurrency, in order to secure the imbalances between financial application and its law and order.
Economic theory suggests that introduction of derivative contracts can improve the informational efficiency of the underlying asset prices (Danthine, 1978). In this study, we examine the impact of the introduction of Bitcoin futures on price clustering in Bitcoin. Our findings suggest that price clustering in Bitcoin meaningfully decreases post the introduction of its futures contracts.
This paper studies the economic functions of blockchain. First, by explaining blockchain technologies from an economic perspective, it introduces the Token Paradigm to summarize mainstream blockchain systems, discusses the true meanings of consensus and trustlessness in the blockchain field, and analyzes the functions of smart contracts. Next, it categorizes major blockchain applications according to how they use tokens and discusses relevant economic problems such as tokensâ monetary features, tokensâ impacts on blockchain platforms, blockchainâs governance functions, and the efficiency and security of blockchain systems. Finally, it discusses the concept of Blockchain as a Financial Infrastructure (BaaFI), which is represented by central bank digital currencies (CBDC) and global stable coins.
This interdisciplinary article discusses the potential consequences due to distributed ledger technology (DLT), tokenization as well as the emergence of new kinds of firm stakeholders, ie the crypto-assets holders, on the governance of small and medium-sized enterprises (SMEs) as well as of publicly traded companies. Since early 2016, a new way of issuing assets and raising funds has rapidly emerged as a major issue for FinTech founders and financial regulators. Frequently referred to as initial coin offerings, initial token offerings (ITO), token generation events (TGE) or simply âtoken salesâ, we use in our article the terminology initial crypto-asset offerings (ICO), as it describes more effectively than âinitial coin offeringsâ the vast diversity of assets (utility tokens, security tokens, crypto-currencies) that could be created and which goes far beyond the sole payment instrument issue.
Classical monetary systems regularly subject the most vulnerable majority of the world's population to debilitating financial shocks, and have manifestly allowed uncontrolled global inequality over the long term. Given these basic failures, how can we avoid asking whether mainstream macroeconomic principles are actually compatible with democratic principles such as equality or the protection of human rights and dignity? This idea paper takes a constructive look at this question, by exploring how alternate monetary principles might result in a form of money more compatible with democratic principles -- dare we call it "democratic money"? In this alternative macroeconomic philosophy, both the supply of and the demand for money must be rooted in people, so as to give all people both equal opportunities for economic participation. Money must be designed around equality, not only across all people alive at a given moment, but also across past and future generations of people, guaranteeing that our descendants cannot be enslaved by their ancestors' economic luck or misfortune. Democratic money must reliably give all people a means to enable everyday commerce, investment, and value creation in good times and bad, and must impose hard limits on financial inequality. Democratic money must itself be governed democratically, and must economically facilitate the needs of citizens in a democracy for trustworthy and unbiased information with which to make wise collective decisions. An intriguing approach to implementing and deploying democratic money is via a cryptocurrency built on a proof-of-personhood foundation, giving each opt-in human participant one equal unit of stake. Such a cryptocurrency would have both interesting similarities to, and important differences from, a Universal Basic Income (UBI) denominated in an existing currency.
Credit scoring is a rigorous statistical analysis carried out by lenders and other third parties to access an individual's creditworthiness. Lenders use credit scoring to estimate the degree of risk in lending money to an individual. However, credit score evaluation is primarily based on a transaction record, payment history, professional background, etc. sourced from different credit bureaus. So, evaluating a credit score is a laborious and tedious task involving a lot of paperwork. In this paper, we propose how blockchain can provide the solution to decentralized credit scoring evaluation and reducing the amount of dependence of paperwork. Lending money is not always objective but subjective to every lender. The decision of lending involves different levels of risk and uncertainty, depending on their perspective. This paper uses the prospect theory to model the optimal investment strategy for different risk vs. return scenarios.
What is the driving force of the evolution of monetary systems in the longrun? Based on an in-depth analysis of economic history and the findings of contemporary studies, Prof. S. Andryushin argues that it is the perpetual rivalry between centralization and decentralization. This article juxtaposes arguments for and against such a viewpoint. In particular, I assert that centralization or decentralization per se cannot safeguard financial stability, nor secure optimality of monetary policy. Both trends need to be assessed alongside with concomitant political and economic factors as well as institutional environment. Against this backdrop, the ongoing trend towards decentralization associated with cryptocurrencies is so far unlikely to remedy all the drawbacks of the contemporary monetary system.
Abstract The market for derivatives is substantially different after the 2007/08 financial crisis. Trust fuels business yet the financial crisis undermined this concept and customers lost faith in financial institutions. The then dichotomy, faced by innovators, was to insist with a system based on trust in financial institutions, or explore others where neither trust nor banks, as intermediaries, were indispensable for the successful and safe completion of financial transactions. The aim of this piece of research is to analyse to what extent innovative technology would change the way the âOver The Counterâ (OTC) market operates by providing investors with a trustworthy platform for the efficient assessment of the risk behind certain financial instruments. Consequently, the market may not be caught by surprise when another financial crisis strikes.
Innovative technologies, such as distributed ledgers, allow securities to be issued or represented in a new form known as digital tokens. Such "tokenisation" of securities will alter post-trade clearing and settlement, and could improve efficiency in some dimensions. But the fundamental trade-offs involving credit risk and liquidity remain in a tokenised world. To succeed, tokens will need to interoperate with account-based systems, at least in the interim.
The Global Financial Crisis of 2008, caused by the accumulation of excessive financial risk, inspired Satoshi Nakamoto to create Bitcoin. Now, more than ten years later, Decentralized Finance (DeFi), a peer-to-peer financial paradigm which leverages blockchain-based smart contracts to ensure its integrity and security, contains over 702m USD of capital as of April 15th, 2020. As this ecosystem develops, it is at risk of the very sort of financial meltdown it is supposed to be preventing. In this paper we explore how design weaknesses and price fluctuations in DeFi protocols could lead to a DeFi crisis. We focus on DeFi lending protocols as they currently constitute most of the DeFi ecosystem with a 76% market share by capital as of April 15th, 2020. First, we demonstrate the feasibility of attacking Maker's governance design to take full control of the protocol, the largest DeFi protocol by market share, which would have allowed the theft of 0.5bn USD of collateral and the minting of an unlimited supply of DAI tokens. In doing so, we present a novel strategy utilizing so-called flash loans that would have in principle allowed the execution of the governance attack in just two transactions and without the need to lock any assets. Approximately two weeks after we disclosed the attack details, Maker modified the governance parameters mitigating the attack vectors. Second, we turn to a central component of financial risk in DeFi lending protocols. Inspired by stress-testing as performed by central banks, we develop a stress-testing framework for a stylized DeFi lending protocol, focusing our attention on the impact of a drying-up of liquidity on protocol solvency. Based on our parameters, we find that with sufficiently illiquidity a lending protocol with a total debt of 400m USD could become undercollateralized within 19 days.
The banking sector has begun a process of digital transformation that is changing the way financial products and services are sold. This transformation is a consequence of the growing demand for digital channels by some sectors of the population, the progress of new technologies and the banksâ need to improve efficiency after the economic crisis. The emergence of innovative financial technology (fintech) startups in the banking sector has been the lever initiating this digital transformation. Technology companies are challenging established banking business models and promoting the democratisation of finance in a more efficient and transparent financial ecosystem. Increasing investment in these technology companies has also attracted the interest of various regulators, and the future suggests a scenario of collaboration between these new players and traditional companies, with a consequently difficult task for the regulators of guaranteeing the same conditions of competition for new entrants and incumbents. However, technology companies with vast experience in the gathering and use of data from millions of users (such as Amazon, Google or Facebook) are considered a threat. Moreover, some types of evolving fintechs, such as neobanks with bank licences, may also become competitors. Distributed ledger technology (DLT) or blockchain, a fintech technology that is evolving constantly, has already awoken the interest of all financial sector participants because it could trigger real disruption and produce a new era of value.
Abstract The emergence of a decentralized peerâtoâpeer (P2P) platform that matches lending and borrowing without collateral requirement could have weakened the bank lending and balance sheet channels of monetary policy, calling monetary policy effectiveness into question. Through the perspective of a new Keynesian model expanded with a twoâsided P2P platform and group identity, we find that monetary policy can be financially destabilizing when firms have access to alternative unregulated financing instruments to dodge monetary grabs. Contractionary monetary policy that aims to disincentivize leverage could unintendedly end up with elevated debt leverage. Although the economy largely responds to productivity and investment shocks as intended by the policy, the responses become more volatile, indicating the weakening monetary grips on the economy.
The purpose of this Note is to determine which cryptocurrency initial distribution methods involve the offering of securities as regulated by the 1933 Securities Act. The primary legal issue is the Howey test. This test identifies whether an offering is an investment contract, and thus subject to regulation by the 1933 Securities Act, based on whether it involves an investment of money in a common enterprise, in which investors are led to expect profits from the efforts of a promoter or third party. The distribution methods discussed are mining, airdropping, forking, and initial coin offerings (âICOsâ). Mining, airdropping and forking are likely not investment contracts, but initial coin offerings likely are. However, regulators should make it clear that mining, airdropping and forking are acceptable practices. Furthermore, they should proceed with a light touch when regulating initial coin offerings, except in the case of fraud. In particular, the ICO community in partnership with government should instigate a system where âcrypto-underwritersâ vet ICOs and the crypto-underwriters are regulated by the SEC.
In recent years, cryptocurrencies have gained growing importance in various sectors, including the real estate market. This fact has spawned a debate about the money laundering risks of the use of cryptocurrencies for property transactions in the United Kingdom. Some think that cryptocurrencies have revolutionary effects on national economies and that they might bring benefits to the real estate market. However, the use of cryptocurrencies raises concerns for their compatibility with the existing UK anti-money laundering legislation. In particular, cryptocurrency transactions can create issues for the customer due diligence checks that the 2017 Money Laundering Regulations impose on real estate agents. This chapter addresses the topic, examining critically the money laundering risks of the use of cryptocurrencies in the UK real estate market. Through an analysis of the literature and with reference to the authorâs empirical research findings, this study sheds light on the subject, providing some innovative perspectives for future legislative and policy action.
Cryptocurrencies are nowadays one of the most important alternative investment markets and therefore have been in spotfor regulatory purposes. One of the main characteristics is to be easy traded all over the world without governmentalinterference