Todayâs economy is being transformed by digitisation, prompting central banks to seriously consider the issuance of central bank digital currencies (CBDCsâ. 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.
Changes in the structure of interest rates affect the decisions of profit-oriented firms directly as well as the profitability of banking operations. Institutional reforms are crucial in allowing the banking system to assume a meaningful independent role in the economic system. A bank branch also is allowed to reallocate loans among the following categories, as long as the overall target is met: loans to state industrial enterprises, to collective industrial enterprises, and to commercial enterprises, both state-owned and collective. Direct or indirect quantitative restrictions on bank credit of course will prevent the multiplier from operating, but by their very nature they defeat the purpose of the decentralization measures. Low interest rates, combined with the fact that for industrial enterprises most working capital is financed by state budget appropriations rather than bank loans, contribute to a somewhat different problem noted by Chinese scholars.
Money is a widely accepted token giving its bearer the right to exchange for goods and services. The money supply is the total value of monetary assets available in an economy at a specific time. A central bank is an institution that manages the currency, money supply and interest rates of a state as well as oversees the commercial banking system. Economists and anthropologists may not agree about the origin of money; however, they do accept that the first form of money was commodity money. Fiat money is legal tender whose value is backed by the government that issued it or parties engaging in exchange agree on its value. Digital money is a type of currency that is available in digital form in contrast to physically structured money such as banknotes and coins. Cryptocurrency is perhaps the most advanced stage of the evolution of money since barter systems.
This chapter looks at the whole landscape involving initial coin offerings (ICOs) beginning with their history, how they came into being, selling of pre-mined tokens, the advantage and disadvantages of investing through ICOs, and issues related to regulation and scams surrounding this new crowdfunding approach. The primary objective of investors to buy tokens through ICOs is to invest money on the potential of a future product. The purpose of arranging an ICO is to raise money for a future project selling its pre-mined tokens to investors. The success of the Ethereum ICO made it possible to generate funds from the initial coin offerings for the development of blockchain projects by releasing some or all of the native tokens. According to the ICO Watch List, the network and telecommunication industry attracted the most significant sum raised by ICOs. The successful launch of the Ethereum platform encouraged other projects to raise capital using ICOs.
Anwar Hasan Abdullah Othman, Syed Musa Alhabshi, Salina Kassim, Ashurov Sharofiddin
Purpose With the continuing development of the financial technology revolution, a better understanding of bank deposits variability has become necessary for bank management and policymakers, especially central banks. This is because the novel innovations of cryptocurrencies operate beyond the realm of the banking system, which may impact the performance of banks and their deposits variability. This study aims to investigate the long- and short-run effects of cryptocurrenciesâ market capitalization development on the banksâ deposit variability in the Gulf Cooperation Council (GCC) region. Design/methodology/approach In this study, the JohansenâJuselius (1990) cointegration test with vector error correction model was applied to examine the long-run relationships, while the Engle and Granger (1987) and the Granger (1969) causality tests were used to detect causal relationships in the short term. Findings The findings of JohansenâJuselius cointegration test indicate that the banksâ deposits variability in all six states of the Gulf region share negative long-run equilibrium association with the development of global cryptocurrencies market capitalization, but with different statistically significant levels. For the short-run analysis, the study found that the development of cryptocurrencies market capitalization has significant unidirectional causal effects on bank deposits variabilities in only four states, namely, UAE, Qatar, Kuwait and Bahrain. The findings of the study therefore suggest that to eradicate the effects of cryptocurrencies industry and its threats to the banking industry, banks in GCC region are encouraged to either consider cryptocurrencies as an alternative investment asset for their portfolio investment diversification strategies or adopt the blockchain technology in their operation system to facilitate their customers with low transaction cost, high level of security and ease of use and real-time settlement. Research limitations/implications The empirical findings of the study will provide valuable input for policymakers, especially central banks and bank managements, to evaluate the current situation and the threats of the cryptocurrencies market growth and its effect on the banking industryâs performance, future survival and their deposits variability for better regulation and policy planning and investment strategies. Originality/value This is a pioneering study that empirically explores the phenomenon of bank deposits variability as a consequence of expansion in cryptocurrencies market capitalization, where the findings proved evidence of a drastic decline in banksâ deposits size due to the substantial growth in cryptocurrencies market capitalization.
Raziyeh RezaâGharehbagh, Ashkan Hafezalkotob, Ahmad Makui, Mohammad Kazem Sayadi
Purpose This study aims to analyze the competition of two financial chains (FCs) when the government intervenes in the financial market to prohibit the excessively high-interest rate by minimizing the arbitrages caused by speculative transactions. Each FC comprises an investor and one intermediary, attempts to finance the capital-constrained firms in financing needs. Design/methodology/approach Using a Stackelberg game theoretic framework and formulating two- and three-level optimization problems for six possible scenarios, the authors establish an integrative framework to evaluate the scenarios through the lens of the two main decision-making structures of the FCs (i.e. centralized and decentralized) and three policies of the government (i.e. speculation minimizing, revenue gaining and utility maximizing). Findings Solving the problem results in optimal values for tariffs, which guarantee a stable competitive market. Consequently, policymaking by the government influences the decision variables, which is shown in a numerical study. The authors find that the government can orchestrate the FCs in the competitive market by imposing tariffs and prohibiting high-interest rates via regulating the speculation impacts, which guarantees a stable market and facilitates the financing of capital-constrained firms. Research limitations/implications This paper aids the financial markets and governments to control the interest rate by minimizing the speculation level. Originality/value This paper investigates the impact of government intervention policies â as a leading player â on the competition of FCs â as followers â in providing financial services and making profits. The government imposes tariffs on the interest rate to stabilize the market by limiting speculative transactions. The paper presents the mathematical models of the optimization problems through the game-theoretic framework and comparison of the scenarios through a numerical experiment.
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 â such as reserve requirements and the discount rates â is declining. But the new digital technologies â such as distributed ledgers â 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 â 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 âlightning networksâ, 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 Commissionâs initial statements and subsequent pronouncements on ICOâs 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.
In my oral comment, at the symposium discussing the book, I made three points. The first point was in support of the bookâs thesis that the zero lower bound on interest rates makes monetary policy an ineffective tool to stimulate aggregate demand at sufficient levels to fight recessions. I argued that monetary policy is further constrained by recent developments in virtual currencies issued by private actors, especially decentralized cryptocurrencies, known as distributed ledger technology. The second point was that the bookâs main thesis, namely that law should be used in addition to traditional monetary and fiscal tools to achieve macroeconomic goals, reminds us of a classic law and economics debateâwhether the law should be used for redistributive purposes alongside the tax and transfer system, or equity should be left to be promoted by the tax and transfer system alone. In this written comment, I choose to elaborate on the...
Anwar Hasan Abdullah Othman, Syed Musa Alhabshi, Razali Haron, Azman Bin Mohd. Noor
Bank stability and trust levels have been seriously affected by the 2007â2008 Global Financial Crisis, which led to the identification of a range of policies based on past experience intended to overcome the consequences of the crisis. The idea of cryptocurrency was introduced to handle the mistrust of financial intermediaries that led to the liquidity crisis. This study investigates whether the new cryptocurrencies have been able to perform the functions of financial intermediaries and offer the confidence level required by bank depositors, examining their long-run effect on banksâ deposit mobilization. The study applies a cointegration test analysis with a vector error correction model to examine this relationship. Overall results indicate that in the countries studied increases in the market capitalization of the cryptocurrency industry have a significant negative impact on banksâ deposit variability, while decreases have a positive impact, with a long-run equilibrium relationship. The outcomes of the study suggest that in order to regain the trust of depositors and avoid the effects of the cryptocurrency industry, banks should be encouraged to invest directly in cryptocurrency or should consider cryptocurrencies as an alternative investment asset for their portfolio investment diversification strategies during bullish market conditions and avoid them during bearish market conditions. Also, banks can incorporate blockchain technology into their operation system and compete with the cryptocurrency industry side by side in the financial market. If neither of these options is taken, however, the banking system may not be able to compete and sustain in the long term using the current operational model. The outcomes of this study can be used as policy guidance by central banks and the banking industry for the betterment of the industry. <b>TOPICS:</b>Currency, legal/regulatory/public policy, statistical methods, portfolio construction
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 clientsâ 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.
Abstract Cryptocurrencies such as Bitcoin or Ethereum are gaining ground not only as alternative modes of payment but also as platforms for financial innovation, particularly through token sales or initial coin offerings (âICOsâ). All of these ventures are based on decentralized, permissionless blockchain technology, distinguished by their openness to, and the formal equality of, participants. However, recent cryptocurrency crises have shown that these architectures lack robust governance frameworks and are therefore prone to patterns of re-centralization. They are informally dominated by coalitions of powerful players within the cryptocurrency ecosystem who may violate basic rules of the blockchain community without accountability or sanction. This chapter first suggests that cryptocurrency and token-based ecosystems can be fruitfully analysed as complex systems that have been studied for decades in complexity theory and have recently gained prominence in financial regulation, too. It applies these insights to three key case studies: the Bitcoin Hard Fork of 2013; the Ethereum hard fork of 2016, following the DAO hack; and the ongoing Bitcoin scaling debate. Second, the chapter argues that complexity-induced uncertainty can be reduced, and elements of stability and order strengthened, by adapting a corporate governance framework to blockchain-based organizations: cryptocurrencies, and decentralized applications built on top of them via token sales. The resulting âcomply-or-explainâ approach combines transparency and accountability with the necessary flexibility that allows blockchain developers to continue to experiment for the sake of innovation. Eventually, however, the coordination of these activities may necessitate the establishment of a self-regulatory institution.
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 âfunctional equivalenceâ, 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 âfunctional equivalenceâ to ârisk equivalenceâ. 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.
With the global proliferation of virtual currency, regulators continue to analyse the market to determine the optimal framework for regulation. A key issue in this evolving regulatory environment is the outstanding question of how virtual currencies should be classified: as securities, commodities, assets or currency, and which government agency should regulate these products. This paper provides an overview of the current regulatory landscape and provide steps that firms and compliance professionals can take to minimise the potential anti-money laundering (AML) and sanctions risks of participating in the cryptocurrency market. Faced with an uncertain and rapidly changing regulatory landscape, this paper encourages cryptocurrency companies that engage in trading and exchange activity to consider implementing a risk-based compliance programme for addressing financial crime risk that is comparable to what a securities broker-dealer would have, considering the similarities they share with the securities industry.
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 âmining poolsâ instead of âsolo miningâ 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.