The recent growth of financial technology ventures involves several types of financial players, including stock exchanges. Many of them are exploring blockchain applications to their multiple business lines, focusing in particular on post trading activities. Potential benefits include the reduction in counterparty risk and post trading costs as well as the increase of liquidity and transparency. At current stage exchanges are mainly exploring the technology looking for proofs of concept, with the exception of some more advanced projects like at Nasdaq and ASX. The mass adoption will require longer efforts and is expected to come in a decade, at least. Fintech developments are receiving strong attention also by regulators and international organizations, given the potential of distributed ledger technology for both competition enhancement and cyber risk reduction. A coordination between market players and regulators is essential to guarantee the effective implementation of new technologies, as their benefits can be delivered only in presence of a common framework and a proper management of risks.
This chapter explores the context for financial integration in Europe, focusing on how changes in global financial markets are shaping the restructuring of finance in the European Union&s;s (EU). It also focuses on the ongoing restructuring of financial services and the moves towards a single currency in the EU. The chapter describes how financial restructuring is likely to affect prevailing regional inequalities in Europe, particularly in the context of the changing map of Europe and the possible enlargement of the EU to include central and eastern European countries. The development of financial markets in eastern Europe is an important part of the transformation from planned to market economies. The European Monetary System did deliver greater monetary stability to European economies, particularly through the mid- to late 1980s. In Hungary, efforts to decentralize the banking system and to introduce competition again started very early.
Stefanie Roos, Pedro Moreno-SĂĄnchez, Aniket Kate, Ian Goldberg
Path-based transaction (PBT) networks, which settle payments from one user to\nanother via a path of intermediaries, are a growing area of research. They\novercome the scalability and privacy issues in cryptocurrencies like Bitcoin\nand Ethereum by replacing expensive and slow on-chain blockchain operations\nwith inexpensive and fast off-chain transfers. In the form of credit networks\nsuch as Ripple and Stellar, they also enable low-price real-time gross\nsettlements across different currencies. For example, SilentWhsipers is a\nrecently proposed fully distributed credit network relying on path-based\ntransactions for secure and in particular private payments without a public\nledger. At the core of a decentralized PBT network is a routing algorithm that\ndiscovers transaction paths between payer and payee. During the last year, a\nnumber of routing algorithms have been proposed. However, the existing ad hoc\nefforts lack either efficiency or privacy. In this work, we first identify\nseveral efficiency concerns in SilentWhsipers. Armed with this knowledge, we\ndesign and evaluate SpeedyMurmurs, a novel routing algorithm for decentralized\nPBT networks using efficient and flexible embedding-based path discovery and\non-demand efficient stabilization to handle the dynamics of a PBT network. Our\nsimulation study, based on real-world data from the currently deployed Ripple\ncredit network, indicates that SpeedyMurmurs reduces the overhead of\nstabilization by up to two orders of magnitude and the overhead of routing a\ntransaction by more than a factor of two. Furthermore, using SpeedyMurmurs\nmaintains at least the same success ratio as decentralized landmark routing,\nwhile providing lower delays. Finally, SpeedyMurmurs achieves key privacy goals\nfor routing in PBT networks.\n
New cryptocurrencies are emerging almost daily, and many interested parties are wondering whether central banks should issue their own versions. But what might central bank cryptocurrencies (CBCCs) look like and would they be useful? This feature provides a taxonomy of money that identifies two types of CBCC â retail and wholesale â and differentiates them from other forms of central bank money such as cash and reserves. It discusses the different characteristics of CBCCs and compares them with existing payment options.
ABSTRACT The blockchain has enabled the successful creation of decentralized digital currency networks. This success has prompted further investigation into the usefulness of blockchains in other business settings. Because of the blockchain's use as a ledger, the question arises whether the blockchain could become a more secure alternative to current accounting ledgers. We show that this is infeasible. By casting this question in the context of the Byzantine Generals Problem, which the blockchain was designed to solve, we identify multiple flaws hindering implementation of the blockchain as a financial reporting tool. Whereas blockchain-based digital currencies only exist within the blockchain, economic transactions exist outside of accounting records. This distinction prevents an acceptable level of transaction verification using the blockchain model. Additionally, the security benefits of the blockchain that render it ostensibly immutable are not fully available or reliable in an accounting setting.
Over the past few years, ... From Google Wallet to Bitcoin, all these technology-enabled financial innovations have been a âwake-up callâ to address the regulatory aspects of a new âeraâ of financial services and market players. The FinTech sector comprises a very heterogeneous group of providers of technology-driven financial innovations. Some of them open up new markets in the financial industry; others offer new solutions to replace or augment products or services already offered by banks, asset managers or insurance companies. More changes are underway with the rapid growth of agile innovative players boasting new business models, user-friendly consumer interfaces, peer-to-peer services or advanced automated tools.
Xingjie Yu, Michael Thang Shiwen, Yingjiu Li, Robert H. Deng
In Bitcoin network, the distributed storage of multiple copies of the blockchain opens up possibilities for double spending, i.e., a payer issues two separate transactions to two different payees transferring the same coins. To detect the doublespending and penalize the malicious payer, decentralized non-equivocation contracts have been proposed. The basic idea of these contracts is that the payer locks some coins in a deposit when he initiates a transaction with the payee. If the payer double spends, a cryptographic primitive called accountable assertions can be used to reveal his Bitcoin credentials for the deposit. Thus, the malicious payer could be penalized by the loss of deposit coins. However, such decentralized non-equivocation contracts are subjected to collusion attacks where the payer colludes with the beneficiary of the deposit and transfers the Bitcoin deposit back to himself when he double spends, resulting in no penalties. On the other hand, even if the beneficiary behaves honestly, the victim payee cannot get any compensation directly from the deposit in the original design. To prevent such collusion attacks, we design fair deposits for Bitcoin transactions to defend against double-spending. The fair deposits ensure that the payer will be penalized by the loss of his deposit coins if he double spends and the victim payee's loss will be compensated. We start with proposing protocols of making a deposit for Bitcoin transactions. We then analyze the performance of deposits made for Bitcoin transactions and show how the fair deposits work efficiently in Bitcoin.
Over the last two decades, key aspects of the financial industry have been automated to a substantial degree. While most progress in automation has come from traditional technologies, recent advances in machine learning, artificial intelligence and robotics are likely to accelerate the pace. In such a context, Distributed Ledger Technologies, Robo-Advisors and cognitive tools are creating a foundation for solving major problems faced by the industry. This paper provides an overview of the capabilities and limitations of these technologies and the challenges that await market participants who want to embrace and implement them. It draws attention to the importance of collaboration, governance, standards and market practice harmonisation in order to successfully deploy these technologies in a multi-party, globalised network environment.
Since the release of Satoshi Nakamotoâs breakthrough white paper in 2008, which preceded disruptive peer to peer value transmission through the Bitcoin network instead of by traditional means, many applications have been sought in financial services generally and more narrowly within capital markets for the Blockchain technology that underpins the Bitcoin network. To date, no capital markets infrastructure globally has implemented a commercially viable Blockchain or distributed ledger technology (DLT) solution. Blockchain technology is also experiencing a period of inflated expectations on a global scale from being a solution to curbing online piracy to replacing rational databases. Within the ambit of capital markets, the most âobviousâ of all the use cases, is in post-trade securities settlement. There are various use-case specific prototypes at custodians, investment banks, stock exchanges and central securities depositories (CSDs) alike. The utopic use-case being the ability for a buyer (investor) to transact directly with a seller on a âpeer to peerâ basis and to have settlement occur in near-immediate time with a low transaction cost and records of the transaction immediately available to the issuer of the stock, even on a crossborder basis. Although public blockchains such as the Bitcoin Blockchain and Ethereum provide the closest match to this elementary example, both have limitations and have experienced cyber security attacks, which have cast doubt over their ability to house or operate notoriously risk-averse capital markets infrastructures. Most of these infrastructures, although largely aligned to international best practices, are designed specifically to suit country or regional specific operations and regulations. This paper will review the approaches, solutions and cryptographic techniques taken to settle securities on a DLT platform to date and why none of these approaches have as yet resulted in commercial use either by an unknown business outside of the capital markets in a disruptive manner or by the incumbents. The approaches and the technology aspects will be combined to develop a conceptual DLT ecosystem for securities settlement. This will be based on available literature that could realistically be applied to a capital markets infrastructure and deliver some of the promises of DLT, which will potentially enhance securities settlement for the purposes of commercial use.
A new wave of technological innovations, often called âfintech,â is accelerating change in the financial sector. What impact might fintech have on financial services, and how should regulation respond? This paper sets out an economic framework for thinking through the channels by which fintech might provide solutions that respond to consumer needs for trust, security, privacy, and better services, change the competitive landscape, and affect regulation. It combines a broad discussion of trends across financial services with a focus on cross-border payments and especially the impact of distributed ledger technology. Overall, the paper finds that boundaries among different types of service providers are blurring; barriers to entry are changing; and improvements in cross-border payments are likely. It argues that regulatory authorities need to balance carefully efficiency and stability trade-offs in the face of rapid changes, and ensure that trust is maintained in an evolving financial system. It also highlights the importance of international cooperation.
This article examines the pricing efficiency of Bitcoin Investment Trust. We investigate the deviation between prices and net asset values and find that there is a significant and persistent premium with an average of 44%. Such evidence points to pricing inefficiency of the currently available trust and encourages practitioners to introduce better instruments such as Exchange Traded Funds as alternatives to investors interested in having exposure to bitcoins and the digital currencies market.
Dong He, Ross Leckow, V. Haksar, Tommaso Mancini-Griffoli · 9 authors
A new wave of technological innovations, often called âfintech,â is accelerating change in the financial sector. What impact might fintech have on financial services, and how should regulation respond? This paper sets out an economic framework for thinking through the channels by which fintech might provide solutions that respond to consumer needs for trust, security, privacy, and better services, change the competitive landscape, and affect regulation. It combines a broad discussion of trends across financial services with a focus on cross-border payments and especially the impact of distributed ledger technology. Overall, the paper finds that boundaries among different types of service providers are blurring; barriers to entry are changing; and improvements in cross-border payments are likely. It argues that regulatory authorities need to balance carefully efficiency and stability trade-offs in the face of rapid changes, and ensure that trust is maintained in an evolving financial system. It also highlights the importance of international cooperation.
Blockchain technology is likely to be a key source of future financial market innovation. It allows for the creation of immutable records of transactions accessible by all participants in a network. A blockchain database is made up of a number of blocks ?chained? together through a reference in each block to the previous block. Each block records one or more transactions, which are essentially changes in the listed owner of assets. New blocks are added to the existing chain through a consensus mechanism in which members of the blockchain network confirm transactions as valid. The technology allows the creation of a network that is ?fully peer to peer, with no trusted third party, ? such as a government agency or financial institution.
The current literature on the coordination of operations and finance does not differentiate longâ and shortâterm debts and therefore is silent on how firmsâ debt maturity structure affects their shortârun financial and operational decisions. Through a dynamic inventory model that explicitly captures a firm's periodic decisions on inventory replenishment quantity, the amount of dividends net of capital subscriptions, and the amount of shortâterm debt, we demonstrate that under coordinated shortâterm operational and financial decisions, the firm's optimal inventory level increases initially as its longâterm debt rises; after the firm depletes its shortâterm borrowing capacity, as the longâterm debt rises further, the inventory level decreases and then remains constant. In addition, we find that optimal coordinated decisions, in comparison with decentralized ones, yield lower inventories, require less cash, take larger shortâterm loans, incur a lower probability of financial distress, and yield higher expected dividends net of capital subscriptions. Moreover, longâ and shortâterm debts are substitutes; an optimally leveraged firm needs less longâterm debt if it coordinates its shortâterm decisions than if it decentralizes them.
We introduce blockchains and distributed ledgers and describe their potential applications to money and banking. The analysis compares public and private ledgers and outlines the suitability of various types of ledgers for different purposes. Furthermore, a few historical prototypes of blockchains and distributed ledgers are presented, and results of their hard forking are illustrated. Next, some potential applications of distributed ledgers to trading, clearing and settlement, payments, trade finance, etc. are outlined. Monetary circuits are argued to be natural applications for blockchains. Finally, the role of digital currencies in modern society is articulated and various forms of digital cash, such as central bank issued electronic cash, bank money, bitcoin and P2P money, are compared and contrasted. Keywords: blockchains, distributed ledgers, digital currencies, modern monetary circuit; credit creation banking; interconnected banking network.
The agencies of money gain new currency as new privately owned systems for creating and transferring value occupy the imagination of industry players and regulators, as well as us everyday folk. Experts have predicted the end of cash and coin almost as soon as modern governments standardized their issue. But before there was coin, there were records of transactions warranting other transactions and literally inscribing (in clay, stone, papyrus) the distributed agencies of human interaction. Asking after the infrastructures facilitating that transfer leads to the role of accounting not as a record of monetary interaction, but as that interaction itself. It is precisely a question of the distribution of agency: who shall make entries into the great ledger of human transaction and exchange? As the ledger pluralizes, who controls the cross-referencing, the gateways between newly dispersed accounts?
William D. Terando, Bryan Cataldi, Brian E. Mennecke
ABSTRACT IRS Notice 2014-21 provides that virtual convertible currencies, including Bitcoins, be treated as property rather than currency, and the general tax principles applicable to property transactions apply to all related transactions. In this paper, we suggest that the ambiguity created by relying on taxpayer intent/use creates an opportunity for Bitcoin traders to approximate the benefits of foreign currency designation under IRC Section 988 by making the IRC Section 475 mark-to-market (MTM) election. We suggest that the IRC Section 475 MTM election is appropriate for bitcoin traders as it allows them to convert unrealized losses into ordinary deductions and approximate foreign currency tax accounting treatment. We also suggest electing IRC Section 475 provides only marginal benefit to bitcoin dealers by accelerating pre-existing business losses to earlier periods through the mark-to-market adjustment.
Following years of study the Gulf Cooperation Council (GCC) appears ready to adopt the recommendations of the International Monetary Fund (IMF) and put in place a tax system that will stabilize revenue. A value added tax (VAT) and corporate income tax (CIT) are considered. A VAT Framework Agreement, that functions like the VAT Directive in the EU, has been agreed. Although new, the GCC VAT is very worthy of attention. From a tax policy perspective, it is making notable improvements to EU VAT design. The GCC VAT is (potentially) the worldâs first real-time, blockchain-secured, multi-jurisdictional VAT. This is a remarkable accomplishment, and it indicates that the GCC has learned and applied a number of global VAT and technology lessons. One of the most visible flaws in the EU VAT is its openness to cross-border frauds â both intra-community and extra-community frauds. Missing traders are the problem. This is what the GCC has corrected. The perpetrators of tax fraud are not at all concerned about the specific tax law that they are abusing; they are looking solely at revenue streams, and the probability that they will get caught. As a result, when a fraudster finds a single activity that attacks multiple tax systems, it becomes a favored vector, and we find a nexus of frauds clustered around a unitary fraud operation. The governmentâs perspective is just the opposite of the fraudsterâs. A focus on one kind of tax fraud may well resolve many more kinds of fraud. This appears to be what will happen as the GCC VAT is rolled out after January 1, 2018. The example considered in this paper involves the illicit cigarette trade. By resolving missing trader frauds, the GCC may (unintentionally) make a serious dent in the illicit cigarette trade and the theft of cigarette tax revenues (a manufacturerâs tax), precisely because the operation of the GCC VAT will increase the cigarette fraudsterâs probability of detection. A âtax fraud nexusâ that could easily be replicated in the GCC (if an unmodified EU-style VAT were to be adopted) can be seen in the Danish chocolate frauds. These frauds were examined in the first program of the three part Danish documentary, How Fraudulent Denmark (SĂ„dan Svindles Danmark). The documentary appeared on DR TV January 12 and 25, and February 1, 2016. The fraud vehicle was candy that was re-sold by traders who purchased expired chocolate from the Mars Denmark Company. The primary fraud, re-packaging and then re-selling expired chocolate was carried out in a manner that attacked two tax regimes â the chocolate tax (a manufacturerâs tax) and the VAT (a consumption tax). This scheme funded organized crime; a different scheme examined in the second program of the documentary funded Islamic terrorists. The GCC seems to be very aware of the missing trader fraud discussed in the documentary. Technology innovations that will suppress it are set out in Article 71 of the GCC Framework Agreement. No other VAT Framework or VAT Directive has such a provision. One of the tax-related side benefits from resolving missing trader fraud in the GCC VAT will likely be the suppression of cigarette smuggling, and the recovery of important revenues from the cigarette tax, which has been raised to a 200% levy. If Denmark had a VAT provision similar to Article 71 it would likely solve the VAT and Chocolate Tax frauds considered in the documentary.
Securities regulators in the world do not actively regulate cryptocurrency yet. For an effective, active securities regulation, I introduce four novel propositions for the regulators. First, the cryptocurrency technology and its peer-to-peer network are meaningless without the activities of the involved people. Second, the private key of cryptocurrency should be utilized as an identification tool. Third, the active regulation should include a mandatory reporting provision of cryptocurrency transactions and balance. Fourth, the transaction size and ledger length of cryptocurrency should be used as regulatory risk measures. My propositions are founded on a combined analysis of law, finance, math, and technology. Then, I discuss a possible unification of currencies across the globe, with the potential to establish an international cryptocurrency authority.