The growing literature on Bitcoin can be divided in two groups. One performs an economic analysis of Bitcoin focusing on its monetary characteristics. The other one looks takes a financial look at the price of Bitcoin. Interestingly, both of these groups have not given much more than passing comments to the problem whether or not Bitcoin has the right monetary rule. This paper argues that Bitcoin in particular, and cryptocurrencies in general, do not have a good monetary rule, and that this shortcoming seriously limits its prospect of becoming a well-established currency.
Author Jiří Málek acknowledges the financial support of Czech Science Foundation with grant GAČR 18-05244S “Innovative Approaches to Credit Risk Management” and Institutional support IP 100040/1020. Author Tran van Quang is grateful for the financial support of grant GAČR 18-05244S “Innovative Approaches to Credit Risk Management” of Czech Science Foundation.
This chapter discusses the decentralization of China’s securities markets and the regulatory roles and ambitions of local governments. Multi-level financial market regulation is an intrinsic part of the Chinese regulatory system, and the chapter looks at the effects and implications of decentralization of financial markets regulation. The powers of local governments to regulate credit companies, financing guarantor companies, private capital management companies, and regional markets are reviewed, as are the economic and political tensions between local and central government objectives, and the possible distorting effects of local government competition for financial services business and private local investment.
The rise of centralized mining pools for risk sharing does not necessarily undermine the decentralization required for permissionless blockchains: Each individual miner's cross-pool diversification and endogenous fees charged by pools generally sustain decentralization, because larger pools better internalize their externality on global hash rates, charge higher fees, attract disproportionately fewer miners, and thus grow more slowly. Instead, mining pools as a financial innovation escalate the arms race among competing miners and thus significantly increase the energy consumption of proof-of-work-based consensus mechanisms. Empirical evidence from Bitcoin mining supports our model predictions. The economic insights inform many other blockchain protocols as well as the industrial organization of mainstream sectors with similar characteristics but ambiguous prior findings.
The two fundamental institution of securities post-trading landscape is the central counterparty (CCP) and the central securities depository (CSD). While the institution of CCP was developed to mitigate risk of the counterparties participating in (securities) trading, the development of CSD was driven by the need of increasing market efficiency by securitization and capital flows. Both institutions was developed by market needs, but later on, following the 2008 financial crisis the importance of these institutions has increased significantly since they have fundamental role in ensuring safe and sound financial markets and crossborder capital flows. All around the world strict regulatory regimes are formulated regarding CCPs and CSDs. As a consequence of 2008 crisis, trade repositories (TR) are established in order to store OTC derivative transaction data. In the future, due to the technological development, the post-trading landscape may change. One direction may be to introduce real spot markets (without settlement cycle) and the other one may be to implement distributed ledger technology to replace the current post-trading framework.
The recent development of private cryptocurrencies has created a need to extend existing models of private currency provision and currency competition. The outcome of cryptocurrency competition should be analyzed in a model which incorporates important features of the modern cryptocurrencies. In this paper I focus on two such features. First, cryptocurrencies operate according to a protocol - a blockchain - and are, therefore, free from the time-inconsistency problem. Second, the operation of the blockchain costs real resources. I use the Lagos-Wright search theoretic monetary model augmented with privately issued currencies as in Fernandez-Villaverde and Sanches (2016) and extend it by linear costs of private currency circulation. I show that in contrast to Fernandez-Villaverde and Sanches (2016) cryptocurrency competition 1) does not deliver price stability and 2) puts downward pressure on the ination in the public currency only when the costs private currency circulation (mining costs) are suciently low.
Cel – Celem opracowania było przedstawienie w aspekcie poznawczym różnych opinii odnośnie do istoty kryptowalut, jako nowego elektronicznego instrumentu płatniczego i jego wpływu na bezpieczeństwo ekonomiczne gospodarki zarówno światowej, jak i lokalnych. Metodologia badania – Analiza opinii finansowych i gospodarczych, analiza źródeł prawa, prezentacja danych statystycznych dotycząca wartości kryptowalut, szacowanie wpływu kryptowalut na poziom gospodarki wybranych państw na podstawie statystycznych danych gospodarczych. Wynik – Opinie na temat istoty kryptowalut i ich oddziaływania są skrajnie zróżnicowane. Kategoria ta, ze względu na jeszcze krótki okres funkcjonowania i odmienność w stosunku do tradycyjnych instrumentów finansowych, nie doczekała się jeszcze pełnej definicji prawnej. W obszarze funkcjonowania banków centralnych zauważa się skrajne stanowiska – od zakazu wprowadzania kryptowalut na rynki finansowe, aż do chęci ich emisji. Także w ocenach ich wpływu na poziom gospodarczy krajów zauważa się odmienne stanowiska: od negacji ich wpływu, a nawet zagrożeń, aż do nadawania kryptowalutom rangi czynnika wzrostu gospodarczego. Oryginalność/wartość – Opracowanie wybiegające poza klasyczne ukazanie mechanizmu funkcjonowania kryptowalut, a w szczególności jako czynnik spekulacyjny przy decyzjach finansowych indywidualnych inwestorów. Wyniki sugerują brak jednolitego stanowiska i opinii zarówno badaczy problemu, jak i państw i instytucji gospodarczych, finansowych i nadzorujących. Brak także wypracowanych mechanizmów ochronnych przed negatywnym wpływem kryptowalut na bezpieczeństwo ekonomiczne gospodarek.
Abstract This chapter provides a discussion on some issues in blockchain finance that regulators are concerned about – an area which bitcoin promoters have remained silent about. Blockchain technology in finance has several benefits for financial intermediation in the financial system; notwithstanding, several issues persist which if addressed can make the adoption of blockchain technology in finance easier and accepted by regulators. The blockchain issues discussed in this chapter are relevant for recent debates in blockchain finance.
The aim of this paper is to analyze the demand of both traditional and new media of exchange – as cryptocurrencies and central bank digital currencies – proposing a novel specification of the demand for money. In this specification, the medium of payment (MOP) has three properties: the first two are the MOP’s standard functions as a medium of exchange and as a store of value, while the third is a novel function as a store of privacy (anonymity value). The proposed framework is tested using a laboratory experiment. Our results show that anonymity matters, but less of the other two properties; at the same time, the presence of anonymity increases the overall appeal of a MOP, particularly if the individuals are risk prone; given anonymity, the sacrifice ratio between liquidity risk and opportunity cost are relatively high.
36 Yale Journal on Regulation 735 (2019).Fintech is the hottest topic in finance today. Recent advances in cryptography, data analytics, and artificial intelligence are visibly “disrupting” traditional methods of delivering financial services and conducting financial transactions. Less visibly, fintech is also changing the way we think about finance: The rise of fintech is gradually recasting our collective understanding of the financial system as simply another sphere of normatively neutral information technology and objective computer science. By making financial transactions faster, cheaper, and more easily accessible, fintech seems to promise a micro-level “win-win” solution to the financial system’s many ills.This Article challenges such narratives and presents an alternative account of fintech as a systemic, macro-level phenomenon. Grounding the analysis of evolving fintech trends in a broader institutional context, the Article exposes the normative and political significance of the current fintech moment. It argues that the arrival of fintech enables a potentially decisive shift in the underlying public-private balance of powers, competencies, and roles in the financial system.In developing this argument, the Article makes three principal scholarly contributions. First, it introduces the concept of the New Deal settlement in finance: a fundamental political arrangement, in force for nearly a century, pursuant to which profit-seeking private actors retain control over allocating capital and generating financial risks, while the sovereign public bears responsibility for maintaining systemic financial stability. Second, the Article advances a novel conceptual framework for understanding the deep-seated financial dynamics that have eroded the New Deal settlement in recent decades. In particular, it offers a working taxonomy of principal mechanisms that both (a) enable private market actors to continuously synthesize tradable financial assets and scale up trading activities, and (b) undermine the public’s ability to manage the resulting system-wide risks. Finally, the Article shows how and why specific fintech applications – cryptocurrencies, distributed ledger technologies, digital crowdfunding, and robo-advising – are poised to amplify the effect of these destabilizing mechanisms, and thus potentially exacerbate the tensions and imbalances in today’s financial markets and the broader economy. It is this potential that renders fintech a public policy challenge of the highest order.
Digitalization makes almost everything quicker, sleeker, and more efficient. Many argue cryptocurrency is the future of money and payment transfers. This paper explores how the unique nature of cryptocurrencies creates barriers to a strict application of traditional regulatory strategies. Indeed, state and federal regulators remain uncertain if and how they can regulate this cutting-edge technology. Cryptocurrency businesses face difficulty navigating the unclear regulatory landscape, and consumers frequently fall prey to misinformation. To reconcile these concerns, this paper asserts cryptocurrency functions as “currency” or “money” and should be treated as such for regulatory purposes. It also proposes each state implement a uniform cryptocurrency-specific framework following the Uniform Regulation of Virtual-Currency Business Act. Such a harmonious approach would reduce compliance costs for cryptocurrency businesses, protect consumers, and provide satisfactory state and federal oversight.
Abstract This article reviews what cryptocurrencies are, and it frames them within the context of historical monetary experiences and contemporary monetary economics. The article argues that, as pure fiduciary private money, cryptocurrencies are a bubble without a fundamental value and they will not provide, in general, optimal amounts of money or deliver price stability. Nevertheless, cryptocurrencies can play a role in improving the current means of payments and in disciplining central banks into providing better government‐run fiduciary monies.
Advocates of cryptocurrencies such as Bitcoin believe that having currency competition will help achieve the economic objective of price stability. This Issue Brief summarizes research that explores whether competition among privately issued fiat currencies can actually produce price stability. The research finds that in most cases, a system of private monies does not deliver price stability. And even when it does, it always is subject to self-fulfilling inflationary episodes, and it supplies a suboptimal amount of money. Although there is no economic reason to curb the use of cryptocurrencies at the moment, it is important to review key regulatory issues that policymakers need to consider now, before the use of cryptocurrencies becomes even more widespread.
Abstract This paper documents inconsistent terminologies and misleading analogies in current discussions of digital money and payments. It offers a more consistent framework for understanding the potential of technological innovation in providing the functions of money and payments: as media of exchange, stores of value, and units of account and the implications of cryptographic technologies underpinning cryptocurrencies for the future of money and payments. These could support efficiency gains in money and payments, but decentralization is not inherent to their application. Radical reform leading to improved economic outcomes is conceivable, but not through disruptive displacement of existing institutional arrangements.