Blockchain Papers

Richard D. Porter, Wade Rousse

No abstract is available for this record.

Massimo Morini

There has been a huge amount of coverage in the press about the great potential uses of bitcoin-related technology for financial markets, such as improvements in efficiency. In addition to the supporters of blockchain, many have been critical of its real-life applications within the business world and suggest that what we are witnessing is nothing short of “blockchain hype, ” and that this technology can only be applied to bitcoins. This paper will demonstrate that there are real business cases for improving financial markets based on the lessons learned from cryptocurrencies, but, unlike what the hype-enthusiasts suggest, they are not application of a technology to the existing business models within financial markets. They are reforms of the business model itself. What needs to be exported from the world of cryptocurrencies are aspects of the market organization, inspiration for a different accounting and legal system, and some aspects of the technology. These can result in a huge contribution towards more robust, efficient, and stable markets. However, the process cannot be immediate and effortless, and can only be achieved within a market-wide strategic perspective. In this paper, I develop these concepts initially within a parallel analysis of cryptocurrencies and financial markets. Then, I will focus on a specific business case regarding the collateralization of financial derivatives, which will highlight quantifiable benefits in terms of reducing costs, capital, and risk. It is an example of a situation where the use of cryptocurrency technology is not more important than the business ideas developed in the analysis of cryptocurrencies; yet it was inconceivable prior to the advent of distributed ledgers, smart contracts, and oracles

Aleksandar Arsov

Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement and improve the constrained optimal resource allocation in Germany. Bitcoin is a digital, decentralized, partially anonymous currency, not backed by German or any government or other legal entity, and not redeemable for gold or other commodities. Bitcoin relies on peer-to-peer networking and cryptography to maintain its integrity. Compared to most currencies or online payment services, such as PayPal, bitcoins are highly liquid, have low transaction costs, and can be used to make micropayments in Germany. Although the Bitcoin economy is flourishing, Bitcoin users are anxious about Bitcoin’s legal status. This paper examines a few relevant legal issues. The research question is to investigate how supplementary digital terminating currency Bitcoin can provide a superior fallback position as e-gold standard in Germany and worldwide. Digital self-liquidating e-Gold ounce could be distributed immediately to voters by using swipe cards used by some governments for transit facilities. Bitcoins as e-Gold ounce do not provide a viable medium of exchange because of the cost of their purchase, creation and/or exchange.

Jill Carlson

The development of cryptocurrency technology has made it possible to transfer value securely and instantaneously without a third party intermediary such as a bank or financial institution. This is an exploratory analysis of where and why this technology has gained traction. In particular, I focus on the hypothesis that the relative popularity of cryptocurrency in Argentina can be explained by the presence of long-term capital controls. To test this hypothesis, I conducted expert interviews with market players. The main conclusion is that cryptocurrency can and has been used to evade capital controls. However, it is unlikely that substantial volumes have been moved via this mechanism. Cryptocurrency’s popularity in Argentina is attributable to more than the country’s history of capital controls or high rates of inflation. Other factors, including tax rate, levels of corruption, and history of multiple exchange rates have also contributed to adoption of this technology in Argentina. I propose further case study research on cryptocurrency in additional countries in order to develop these theories.

Trent MacDonald, Darcy W E Allen, Jason Potts

No abstract is available for this record.

Makari Krause

Bitcoin has become notorious as the first cryptocurrency to gain widespread media attention, however, despite its many benefits over the existing financial system it remains a volatile fringe currency. This thesis examines the validity of bitcoin as a currency and whether it can play a role in circumventing extractive economic and political institutions in developing countries. The analysis compares bitcoin usage to the level of financial openness, the inflation rate, and the percentage of the population with a bank account in 21 different countries. The correlation is found to be both statistically and economically significant for all of these variables, which suggests that bitcoin is being used in countries with underdeveloped financial systems and detrimental monetary policies. A regression run on these variables indicates that a one-percentage-point increase in inflation leads to a 44.48% increase in bitcoin usage, a one-percentage-point increase in the percentage of people in a country that have a bank account leads to an 8.65% decrease in bitcoin usage and a one unit increase in financial openness leads to a 216% decrease in bitcoin usage. Throughout this analysis the positive and negative implications of widespread bitcoin adoption are discussed with respect to economies in the developing world.

Dong He, Karl Habermeier, Ross Leckow, Vikram Haksar · 11 authors

New technologies are driving transformational changes in the global financial system. Virtual currencies (VCs) and the underlying distributed ledger systems are among these. VCs offer many potential benefits, but also considerable risks. VCs could raise efficiency and in the long run strengthen financial inclusion. At the same time, VCs could be potential vehicles for money laundering, terrorist financing, tax evasion and fraud. While risks to the conduct of monetary policy seem less likely to arise at this stage given the very small scale of VCs, risks to financial stability may eventually emerge as the new technologies become more widely used. National authorities have begun to address these challenges and will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation. As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization and cooperation across jurisdictions.

FC 2017 Sliema, Michael 1974- Brenner, Kurt Rohloff, Joseph Bonneau · 12 authors

No abstract is available for this record.

Katya Malinova

Blockchain or, more generally, distributed ledger technology allows to create a decentralized digital ledger of transactions and to share it among a network of computers. In this paper, we argue that the implementation of this technology in financial markets offers investors new options for managing the degree of transparency of their holdings and their trading intentions. We first identify two intrinsic features of a distributed ledger that impact the availability of these new options, namely the mapping between identifiers and end-investors and the degree of transparency of the ledger, and we then examine how the implementation design of these critical features affects investor trading behavior, trading costs, and investor welfare, in a theoretical model of intermediated and peer-to-peer trading. The most transparent setting yields the highest investor welfare, despite the risk of front-running. In the absence of full transparency, welfare is weakly higher if investors are allowed to split their holdings among many identifiers.

John Barrdear, Michael Kumhof

We study the macroeconomic consequences of issuing central bank digital currency (CBDC) — a universally accessible and interest-bearing central bank liability, implemented via distributed ledgers, that competes with bank deposits as medium of exchange. In a DSGE model calibrated to match the pre-crisis United States, we find that CBDC issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs. Countercyclical CBDC price or quantity rules, as a second monetary policy instrument, could substantially improve the central bank’s ability to stabilise the business cycle.

Ferdinando M. Ametrano, Emilio Barucci, Daniele Marazzina, Stefano Zanero

No abstract is available for this record.

Mark Manning

This paper explores the potential role of DLT in securities markets, using the equity market as an example. The paper discusses potential benefits and costs, drawing out limitations and challenges in the adoption of the new technology, as well as regulatory considerations. Despite the heightened interest in DLT, the paper concludes that the likely path is incremental adoption of the technology rather than wholesale replacement of the existing infrastructure. An earlier version of this paper was presented at the 21st Melbourne Money and Finance Conference.

Lan Ju, Timothy Lu, Zhiyong Tu

Abstract This paper studies the risk of Bitcoin being used for the purpose of capital flight. We propose a new indicator, the bitcoin‐implied exchange rate discount, to identify empirically capital flight via Bitcoin. Using data from the two largest bitcoin exchanges in the world during our sample period, BTC China and Bitstamp, we find strong evidence of capital flight from the Chinese Renminbi to the US Dollar via Bitcoin before the People's Bank of China, China's central bank, announced its regulatory policy on December 5, 2013, while the evidence displays no trace of capital flight after the announcement. The People's Bank of China's Bitcoin restriction policy successfully halts the illicit capital outflow via Bitcoin, thereby providing valuable policy implications for government regulation on Bitcoin, as well as on other virtual currencies.

Panos Kouvelis, Wenhui Zhao

We study contract design and coordination of a supply chain with one supplier and one retailer, both of which are capital constrained and in need of short-term financing for their operations. Competitively priced bank loans are available, and the failure of loan repayment leads to bankruptcy, where default costs may include variable (proportional to the firm’s sales) and fixed costs. Without default costs, it is known that simple contracts (e.g., revenue-sharing, buyback, and quantity discount) can coordinate and allocate profits arbitrarily in the chain. With only variable default costs, buyback contracts remain coordinating and equivalent to revenue-sharing contracts but are Pareto dominated by revenue-sharing contracts when fixed default costs are present. Thus, for general bankruptcy costs, contracts without buyback terms are of most interest. Quantity discount contracts fail to coordinate the supply chain, since a necessary condition for coordination is to proportionally reallocate debt obligations within the channel. With only variable default costs and with high fixed default costs exhibiting substantial economies-of-scale, revenue-sharing contracts with working capital coordination continue to coordinate the chain. Unexpectedly, for fixed default costs with small economies-of-scale effects, the two-firm system under a revenue-sharing contract with working capital coordination might have higher expected profit than the one-firm system. Our results provide support for the use of revenue-sharing contracts with working capital coordination for decentralized management of supply chains when there are bankruptcy risks and default costs. This paper was accepted by Serguei Netessine, operations management.

Hanna Hałaburda, Miklós Sárváry

Digital currencies are a fairly new phenomenon brought about by the spectacular rise of the internet. While Bitcoin is the most famous, there are numerous other digital currencies—from Amazon Coin to Zetacoin. Beyond Bitcoin explores the economic forces underlying the design of their features and their potential. Halaburda and Sarvary argue that digital currencies are best understood by considering the economic incentives driving their creators and users. The authors present a framework that will allow systemic analysis of this dynamic environment and support further discussion of the design of digital currencies' features and the competition in the market.

Dirk G. Baur, KiHoon Hong, Adrian D. Lee

Bitcoin is defined as digital money within a decentralized peer-to-peer payment network. It is a hybrid between fiat currency and commodity currency without intrinsic value and independent of any government or monetary authority. This paper analyses the question of whether bitcoin is a currency or an asset and, more specifically, what is its current usage and what usage will prevail in the future, given its characteristics? We analyse the statistical properties of bitcoin and find that it is essentially uncorrelated with traditional asset classes such as stocks, bonds and commodities, both in normal times and in periods of financial turmoil. The analysis of transaction data of bitcoin accounts shows that bitcoins are mainly used as a speculative investment and not as an alternative currency and medium of exchange. Bitcoin is still small relative to the size of other asset classes and, thus, does not pose an immediate risk for monetary, financial or economic stability.

Beate Sauer

Bitcoin gains more and more attention in the general public and is already the most popular virtual currency. At the same time, the acceptance of Bitcoin as a speculative asset and also as a payment vehicle increases. This is an indication that we might now be entering an era of parallel currency systems. Therefore, one could state that the Bitcoin network and the central banking system could become two rival systems with respect to issuing payment vehicles and providing cross-border payment systems. Our aim is to analyse the central bank incentives for establishing a network model that includes hacking. With our model we are able to explain why central banks have no incentive to advance Bitcoin regulation at the current stage of development, as this would reduce the critical mass of Bitcoin users. Finally, in combination with a central bank loss function, we are able to calculate an optimal level of central regulation.

Udo Milkau, Jürgen Bott

‘Digitalisation’ seems to be the current buzz word, and it is used to discuss various things from 3D printers via always-on health sensors powered by smartphones to challenges in financial services by new ‘non-bank’ players (so-called FinTechs), which track relationships with the clients. Payments, as an electronic product offered by banks for decades, are taken here as the subject of study to analyse the impact of digitalisation and future developments in payments. This is based on three examples representing three antagonistic concepts: interoperability, centralisation, and distributed systems. The examples highlighted here are: first, the implementation of the Single Euro Payments Area in Europe and a comparison between some original objectives with the current status of realisation; second, the development of so-called business platforms, such as Google or Facebook, which facilitate exchange between the agents in a multi-sided market; third, the emergence of digital currencies such as Bitcoins with decentralised ledgers and decentralised consensus systems used as means of payment. For all three examples, the form of digitalisation, the current implementation, potential limitations and future development paths are compared. Finally, the question of what a future payments ecosystem will look like and whether there will be a shift from interoperability to centralised models are discussed with the clients.

Christian Jaag, Christian W. Bach

Contrary to traditional currencies, cryptocurrencies neither have physical form nor are they guaranteed or backed by any central authority. They simply attain value by usage and the confidence of those participating in the respective system. A crypto-paymentsystem is a technology which allows for payments between individuals digitally without relying on central institutions, intermediaries or further infrastructure as required for conventional payment systems. While its legitimacy as currency has been questioned due to its high exchange rate volatility, the significant potential of the Bitcoin technology as a payment system is undeniable. As postal operators typically have a role as financial intermediaries and act in an inter-national and increasingly digital environment, crypto-paymentsystems may be of particular interest to them. In fact, as the post has a wide network of access points and is highly trusted by the general public, it may be well-suited to offer services which counter some disadvantages of crypto-paymentsystems and cryptocurrencies, while retain-ing the benefits of their technology. By turning to crypto-paymentsystems postal operators may extend their role as a financial intermediary with new domestic and interna-tional services. Furthermore, postal operators may even issue their own cryptocurrency to protect customers from the high exchange-rate volatility of cryptocurrencies.

Gabrielle Durana

Échapper aux banques : une utopie qui a retrouvé de sa vigueur au lendemain de la crise des subprime et a donné naissance au « bitcoin », une monnaie numérique sur laquelle ont très vite commencé les spéculations, financières et autres. Mais quelle est la portée réelle de cette invention ?

Bennett T. McCallum

The likelihood of the Bitcoin system replacing the Federal Reserve as the main provider of money in the United States and the desirability of such a transformation are the topics of this article. (1) With respect to the first of these topics, one needs to consider how far the so-called Bitcoin Revolution has progressed by estimating the average volume of transactions conducted per time period by means of Bitcoin payments, and then compare recent values of that magnitude with the total volume per period of dollar payments in the United States. (2) Francois Velde of the Federal Reserve Bank of Chicago has estimated that, as of late 2013, the average volume of bitcoin transactions per minute totaled less than four-tenths of 1 percent of average dollar transactions per minute--actually, not total dollar transactions but only the subset conducted by means of Visa credit card payments (Velde 2013). In the months since the publication of Velde's article the volume of bitcoin payments has been growing rapidly, but their quantitative extent is still negligible from a macroeconomic perspective. In fact, this 0.004 magnitude is quite close to the ratio implied by magnitudes of Bitcoin and Visa daily transactions averaged over the most recent 12 months as reported on August 7, 2014, by the coinometrics.com web site. These magnitudes are $57.3 million and $16,518 million, so the implied ratio is 0.00345. Alternatively, in terms of stocks, rather than transactions, the Ml measure of the U.S. money supply (currency plus demand deposits) is currently about $2,835 billion (as of August 7, 2014) with bitcoins worth $7.7 billion, for a ratio of 0.00272- again, of the same order of magnitude. Another way to express the point that Bitcoin is not at this time a quantitatively important money is to reflect on the economist's standard definition of money--namely, an entity that serves as a of exchange, store of value, and of account. (3) Doing so, one recognizes that some clarification in this common description is necessary to make it analytically coherent. First, traditional money is typically a tangible object (e.g., metallic coins, government issued currency, or legal claims to such coins or currency) and thus is not itself a of which is intangible. Indeed, careful terminology would replace unit of account with medium of account, a specified amount of which serves as the of account. (4) Also, it is necessary to recognize that in developed economies tangible money does not rank highly as a store of value. For example, in the United States, during the first quarter of 2014, aggregate assets of households and nonprofit organizations together totaled $95,549 billion whereas checkable deposits and currency holdings by these units came to only $1,096 billion (roughly 1/100 of their assets). (3) Much larger components of household plus nonprofit-organization wealth include the reported monetary value of houses, furniture, automobiles, etc. Some major categories are real estate ($22,820 billion), corporate equities ($13,502 billion), corporate and foreign bonds ($2,626 billion), and pension entitlements ($19,766 billion). Accordingly, it is the medium-of-exchange role that is the primary attribute that serves to define money. (6) But an important qualifier often made explicit is that money is a generally acceptable of exchange. By that standard bitcoins do not qualify as money. Indeed, for most members of the U.S. population there are very few, if any, of their basic payments that could be made using bitcoins. None of the foregoing arguments rule out the possibility that Bitcoin will become a major--or even the main--medium of exchange in the future. (7) But as of today it seems likely that for law-abiding U.S. citizens the practical attractions of Bitcoin are primarily as a financial investment with very high volatility and as a means of participating in an intellectually fascinating, avant-garde, and potentially revolutionary, social experiment. …

Charles Cuvelliez, Olivier Markowitch

info:eu-repo/semantics/published

Ashley S. Harrison, M. Scott Niederjohn, J. R. Clark

Economists define money as anything that is generally accepted in payment for goods and services or in the repayment of debts.1 Paper money and coins clearly fit this definition, but deposits in checking accounts are so widely accepted that they are also considered in the narrowest definition of money used by the Federal Reserve, called “M1.” M1 is the sum of all currency, checkable deposits, and travelers checks. How about savings accounts? These amounts are so quickly convertible into M1 that many economists consider them money too, part of a larger total called M2 that includes all of M1 plus all small denomination time deposits (bank CDs), savings accounts, and money market account balances. M2 then represents a form of money that is less “liquid” (less easily converted and spent) than M1. In addition to this definition, money is expected to satisfy three functions: serve as a medium of exchange, a store of value, and a unit of account. In this article, we will explore what Bitcoin is and why it has been so prevalent in the news of late. Further, we will apply the three functions of money to Bitcoin and discuss whether it should be considered a form of money. Some of the benefits and problems associated with Bitcoin will be discussed along with its future potential.

Ludovic Vigneron, Ramzi Benkraiem

Using a new and unique dataset dealing with French small and medium-sized enterprise (SME) financing that provides detailed information about 1 116 firm-bank relationships, we test how the number of banks with which a firm works and the organizational structure of its main bank influence its risk-taking behavior. We find evidence that SMEs engaged with a decentralized main bank (a local or mutual one) invest in less risky projects, especially when they work with fewer than three banks (one or two). We also find evidence that single-bank SMEs engaged with a centralized bank (a large or foreign one) take significantly more risks than the others.